Gyre Therapeutics(GYRE) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Presents unaudited condensed consolidated financial statements and notes, detailing financial performance for Q2 2023 and FY2022 Condensed Consolidated Balance Sheets Total assets decreased from $28.4 million to $12.4 million, primarily due to reduced cash and CVR reclassification | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | Change | | :-------------------------- | :----------------------------- | :------------------------------- | :----- | | Cash and cash equivalents | $6,923 | $21,666 | -$14,743 | | Total current assets | $7,620 | $28,206 | -$20,586 | | Long-term receivable from GCBP | $4,606 | $0 | +$4,606 | | Total assets | $12,394 | $28,444 | -$16,050 | | Total current liabilities | $2,793 | $16,824 | -$14,031 | | CVR derivative liability, noncurrent | $4,606 | $0 | +$4,606 | | Total liabilities | $7,399 | $16,824 | -$9,425 | | Total stockholders' deficit | $(28,314) | $(21,689) | -$6,625 | Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) Q2 2023 reported a $2.5 million net loss, a sharp decline from $51.6 million net income in Q2 2022, due to lower asset disposal gains | Metric | Q2 2023 (in thousands) | Q2 2022 (in thousands) | Change ($) | Change (%) | | :------------------------------------------ | :--------------------- | :--------------------- | :--------- | :--------- | | Revenue: Collaboration | $0 | $0 | $0 | 0% | | Research and development expenses | $318 | $1,871 | -$1,553 | -83% | | General and administrative expenses | $2,225 | $3,844 | -$1,619 | -42% | | Gain on disposal of assets, net | $0 | $(57,245) | +$57,245 | -100% | | Net income (loss) | $(2,472) | $51,632 | -$54,104 | * | | Net income (loss) per share, basic | $(0.07) | $1.64 | -$1.71 | * | | Cash dividends paid per common share | $0 | $0 | $0 | 0% | | CVR cash dividends paid per common share | $0.11 | $0 | +$0.11 | * | | Metric | YTD June 30, 2023 (in thousands) | YTD June 30, 2022 (in thousands) | Change ($) | Change (%) | | :------------------------------------------ | :------------------------------- | :------------------------------- | :--------- | :--------- | | Revenue: Collaboration | $0 | $794 | -$794 | -100% | | Research and development expenses | $906 | $11,574 | -$10,668 | -92% | | General and administrative expenses | $6,195 | $8,838 | -$2,643 | -30% | | Gain on disposal of assets, net | $(4,736) | $(57,245) | +$52,509 | -92% | | Net income (loss) | $(2,212) | $37,096 | -$39,308 | * | | Net income (loss) per share, basic | $(0.06) | $1.18 | -$1.24 | * | | Cash dividends paid per common share | $0.24 | $0 | +$0.24 | * | | CVR cash dividends paid per common share | $0.12 | $0 | +$0.12 | * | Condensed Consolidated Statements of Redeemable Convertible and Redeemable Preferred Stock and Stockholders' Equity (Deficit) Stockholders' deficit increased from $21.7 million to $28.3 million, due to net loss, CVR adjustments, and Series Y preferred stock issuance | Metric | December 31, 2022 (in thousands) | June 30, 2023 (in thousands) | Change | | :------------------------------------ | :----------------------------- | :--------------------------- | :------- | | Redeemable Convertible Preferred Stock | $33,309 | $33,309 | $0 | | Redeemable Preferred Stock | $0 | $0 | $0 | | Common Stock (shares) | 37,756,574 | 37,974,892 | +218,318 | | Additional Paid-In Capital | $389,210 | $384,797 | -$4,413 | | Accumulated Deficit | $(410,936) | $(413,148) | -$2,212 | | Total Stockholders' Deficit | $(21,689) | $(28,314) | -$6,625 | - Issuance of 37,975 shares of Series Y redeemable preferred stock for stock dividends in June 2023[14] - CVR cash dividends paid related to GCBP Agreement: $(206) thousand[14] - CVR derivative liability adjustment: $(4,530) thousand[14] Condensed Consolidated Statements of Cash Flows Net cash decreased by $14.7 million for YTD June 30, 2023, from operating, investing, and financing activities | Cash Flow Activity | Six Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2022 (in thousands) | Change | | :------------------------------------ | :------------------------------------------ | :------------------------------------------ | :------- | | Net cash flows used in operating activities | $(8,687) | $(24,344) | +$15,657 | | Net cash flows provided by investing activities | $5,206 | $55,375 | -$50,169 | | Net cash flows (used in) provided by financing activities | $(11,262) | $16 | -$11,278 | | Net (decrease) increase in cash and cash equivalents | $(14,743) | $31,047 | -$45,790 | | Cash and cash equivalents at end of period | $6,923 | $75,394 | -$68,471 | - Investing activities in 2023 included $5.0 million from Vertex hold-back and $1.0 million from GCBP asset sale, offset by $0.8 million in transaction costs[118] - Financing activities in 2023 included $11.3 million in dividend payments and CVR distributions[120] Notes to the Unaudited Interim Condensed Consolidated Financial Statements Notes detail strategic shift, liquidity, accounting policies, asset acquisitions, fair value, stock compensation, and going concern risk Note 1. Nature of Operations and Liquidity Catalyst transitioned to F351 asset acquisition and BC business combination, facing substantial going concern doubt due to a potential $43.2 million preferred stock redemption - Company ceased R&D activities in March 2022, sold complement portfolio to Vertex in May 2022, and rare bleeding disorder program to GCBP in February 2023[19] - Acquired F351 Assets (Hydronidone compound for NASH) from GNI Group Ltd. in December 2022 for $35.0 million in common and preferred stock[20] - Signed Business Combination Agreement to acquire indirect controlling interest in Beijing Continent Pharmaceutical Co Ltd. (BC), subject to stockholder approval on August 29, 2023[21] - Issued Contingent Value Rights (CVRs) to common stockholders (excluding GNI) for future cash payments from asset dispositions[22] - Paid a one-time cash dividend of $0.24 per share ($7.6 million total) on January 12, 2023[23] - Distributed $0.01 per share from GCBP asset sale (March 2023) and $0.11 per share from Vertex hold-back (June 2023) to CVR Holders[24][25] - Net loss of $2.2 million for six months ended June 30, 2023, with an accumulated deficit of $413.1 million and cash of $6.9 million[26] - Substantial doubt about going concern due to potential $43.2 million cash payment for Catalyst Convertible Preferred Stock if stockholder approval for conversion is not received by September 30, 2023[26][38] Note 2. Summary of Significant Accounting Policies Financial statements adhere to GAAP, reflecting management estimates; ASU 2016-13 adoption had no material impact, and fair value option elected for GCBP receivable - Financial statements prepared under GAAP for interim reporting, with normal recurring adjustments[27] - Management makes estimates for revenue recognition, CVR derivative liabilities, accrued expenses, etc[29] - Adopted ASU 2016-13 (Credit Losses) on January 1, 2023, with no material impact[30] - Long-term receivable from GCBP accounted for under the fair value option, with changes in fair value recorded in interest and other income[31] Note 3. F351 Asset Acquisition Catalyst acquired F351 Assets from GNI for $35.0 million in equity, facing a $43.2 million cash redemption risk if preferred stock conversion lacks stockholder approval - Acquired F351 Assets from GNI on December 26, 2022, for $35.0 million in equity (6,266,521 common shares and 12,340 Catalyst Convertible Preferred Stock shares)[35] - Acquisition classified as an asset acquisition, not a business[36] - Each Catalyst Convertible Preferred Stock share is convertible into 10,000 common shares, subject to stockholder approval by September 30, 2023[37][38] - Failure to obtain approval by September 30, 2023, could trigger a $43.2 million cash redemption obligation for the preferred stock, exceeding current liquidity[38] Note 4. Fair Value Measurements Assets and liabilities are measured at fair value, including money market funds (Level 1) and GCBP receivable/CVR derivative liability (Level 3), with Vertex CVR settled | Financial Instrument | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | Fair Value Level | | :-------------------------- | :----------------------------- | :------------------------------- | :--------------- | | Money market funds | $6,923 | $21,666 | Level 1 | | Long-term receivable from GCBP | $4,606 | $0 | Level 3 | | CVR derivative liability, noncurrent | $4,606 | $0 | Level 3 | | CVR derivative liability (current) | $0 | $5,000 | Level 3 | - CVR derivative liability for Vertex was initially $5.0 million and settled in May 2023 with a $5.0 million hold-back payment distribution[42] - Long-term receivable and CVR derivative liability from GCBP are $4.6 million, based on a $5.0 million hold-back payment expected in Q1 2025, discounted at 5.05%[43] Note 5. Lease Corporate headquarters lease expired, now month-to-month, with sublease income and significantly decreased operating lease expenses - Corporate headquarters lease expired April 30, 2023; now month-to-month[45] - Sublease income: $13,000 (Q2 2023), $0.1 million (YTD 2023), $38,000 (Q2 2022)[46] - Operating lease expense: $17,000 (Q2 2023), $0.1 million (YTD 2023), compared to $0.6 million (Q2 2022) and $1.1 million (YTD 2022)[47] Note 6. Stock Based Compensation 2018 Omnibus Incentive Plan shares increased; January 2023 cash dividend modified stock options without incremental cost, decreasing stock-based compensation - 2018 Omnibus Incentive Plan shares increased to 31,456,403, with 25,521,867 shares available for future grant as of June 30, 2023[48] - Special cash dividend in January 2023 resulted in stock option modification (decreased exercise price, increased shares) to preserve value, with no incremental compensation cost[50] - Outstanding options at June 30, 2023: 8,246,945 shares with a weighted-average exercise price of $1.32[51] | Stock-Based Compensation Expense (in thousands) | Q2 2023 | Q2 2022 | YTD 2023 | YTD 2022 | | :------------------------------------ | :------ | :------ | :------- | :------- | | Research and development | $1 | $83 | $67 | $211 | | General and administrative | $88 | $263 | $232 | $650 | | Total | $89 | $346 | $299 | $861 | Note 7. Net Income (Loss) per Share Attributable to Common Stockholders EPS is calculated using the two-class method; potentially dilutive securities excluded from diluted EPS for YTD June 30, 2023, due to anti-dilutive effects or unmet conversion - Uses two-class method for EPS calculation[32] - Catalyst Convertible Preferred Stock excluded from basic EPS (not participating until merger closes) and diluted EPS (conversion contingent)[32][34][55] - Potentially dilutive securities excluded from diluted EPS due to anti-dilutive effect: 8,246,945 options (YTD 2023) vs. 2,512,078 options (YTD 2022)[55] | EPS Metric | Q2 2023 | Q2 2022 | YTD 2023 | YTD 2022 | | :------------------------------------ | :------ | :------ | :------- | :------- | | Net income (loss) (in thousands) | $(2,472) | $51,632 | $(2,212) | $37,096 | | Basic EPS | $(0.07) | $1.64 | $(0.06) | $1.18 | | Diluted EPS | $(0.07) | $1.64 | $(0.06) | $1.18 | Note 8. Commitments and Contingencies The company faces financial market risks and significant commitments from the GNI Business Combination Agreement, including potential $2.0 million termination fees, CVR cash payments, and $0.5 million in F351 manufacturing agreements - Exposure to financial market uncertainties, particularly regarding bank liquidity[57] - Business Combination Agreement with GNI to acquire BC is subject to stockholder approval on August 29, 2023; up to 1,110,776,224 common shares to be issued[58] - Termination of Business Combination Agreement could incur a $2.0 million fee and up to $2.0 million in expense reimbursements[59] - CVR Agreement entitles holders to cash payments from legacy asset dispositions (GCBP, Vertex) and excess cash[60] - Distributed $3.5 million (net of expenses) from Vertex hold-back (June 2023) and $0.2 million from GCBP asset sale (March 2023) to CVR Holders[61][62] - Entered into manufacturing agreements for F351 Assets totaling up to $0.5 million, terminable with 90 days' notice[63] Note 9. Income Taxes Minimal income tax expense in 2023, no NOL benefits recognized due to uncertainty, despite significant federal ($193.8 million) and state ($3.6 million) NOL carryforwards subject to Section 382 limitations - Income tax expense: $2,000 (Q2 2023), $16,000 (YTD 2023) No expense in 2022[64] - No income tax benefits recognized for NOLs or R&D tax credits due to uncertainty[64] - Federal NOL carryforwards: $193.8 million (indefinite carryforward)[65] - State NOL carryforwards: $3.6 million (expire starting 2034)[65] - NOL utilization subject to Section 382 limitations due to ownership changes (latest on December 26, 2022)[67] Note 10. Stockholders' Equity (Deficit) Authorized preferred stock, designating shares for Catalyst Convertible and Series Y redeemable preferred stock, with Series Y issued as a dividend for a reverse stock split proposal and classified as temporary equity - Authorized 5,000,000 shares of preferred stock; 123,418 designated as Catalyst Convertible Preferred Stock and 161,160 as Series Y redeemable preferred stock[68] - Series Y Preferred Stock issued as a dividend on June 20, 2023, granting 250,000 votes per share for a reverse stock split proposal[69] - Series Y Preferred Stock is redeemable at $0.001 per share and classified as temporary equity due to redemption features not solely within company control[69][70] Note 11. Restructuring Catalyst underwent significant restructuring, including workforce reductions and the sale of its complement portfolio to Vertex for $60.0 million and rare bleeding disorder program to GCBP for $6.0 million, generating substantial gains and CVR distributions - Workforce reductions in November 2021 (35% of employees) and March 2022 (22 full-time employees)[71][72] - Sold lab equipment, consumables, and furniture for $0.4 million in Q2 2022, resulting in a $0.2 million loss on disposal[73] - Sold complement portfolio to Vertex in May 2022 for $60.0 million cash ($55.0 million upfront, $5.0 million hold-back received May 2023) Recorded a $57.4 million gain[74][75] - Distributed $3.5 million (net of expenses) from Vertex hold-back to CVR Holders in June 2023[75] - Sold rare bleeding disorder program to GCBP in February 2023 for $6.0 million cash ($1.0 million upfront, $5.0 million hold-back due in 2 years) Recorded a $4.7 million gain[76] - Distributed $0.2 million (net of expenses) from GCBP upfront payment to CVR Holders in March 2023[76] Note 12. Related Parties GNI Group Ltd. is a related party, owning 100% of Catalyst Convertible Preferred Stock and 80.4% of common stock (as-converted), with $0.3 million in F351 development costs receivable from GNI USA, Inc - GNI Group Ltd. is a related party, owning 100% of Catalyst Convertible Preferred Stock and 80.4% of outstanding capital stock (as-converted) as of June 30, 2023[77] - Entered into a Cost Sharing and Agency Agreement with GNI USA, Inc. for F351 Asset development costs[78] - $0.3 million in F351 development costs incurred and receivable from GNI as of June 30, 2023[78] Note 13. Condensed Consolidated Financial Statements Detail Details other accrued liabilities, primarily consisting of $1.5 million in tax liability and $0.2 million in professional and consulting services as of June 30, 2023 | Other Accrued Liabilities (in thousands) | June 30, 2023 | December 31, 2022 | | :------------------------------------ | :------------ | :---------------- | | Tax liability | $1,500 | $0 | | Professional and consulting services | $210 | $1,417 | | Manufacturing | $87 | $22 | | Other | $271 | $13 | | Total other accrued liabilities | $2,068 | $1,452 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses strategic shift to asset acquisition and business combination, financial impacts, and critical liquidity challenges, including going concern risk Overview Catalyst underwent a strategic transformation, acquiring F351 Assets and entering a business combination with BC, following prior R&D cessation and legacy portfolio divestiture - Acquired F351 Assets (15 patents/applications outside China, expiring by August 2037) from GNI for $35.0 million in common and Catalyst Convertible Preferred Stock[82] - Catalyst Convertible Preferred Stock is convertible into 10,000 common shares per preferred share, subject to stockholder approval (expected August 29, 2023)[83] - Entered Business Combination Agreement with GNI to acquire indirect controlling interest in BC, a China-based pharmaceutical company, subject to stockholder approval (expected August 29, 2023) Up to 1,110,776,224 common shares to be issued[84][58] - CVR Agreement grants holders rights to cash payments from legacy asset dispositions (Vertex, GCBP) and excess cash, with distributions already made[87][88] - Company ceased all previous R&D activities by June 2022 and began supporting F351 Assets development in April 2023[94] Financial Operations Overview Catalyst incurred significant operating losses, with a net loss of $2.5 million in Q2 2023, as collaboration revenue ceased, R&D and G&A expenses decreased, and asset disposal gains were a major income source - No drug product sales revenue; collaboration revenue ceased after Biogen Agreement termination in May 2022[89][91] - Net loss of $2.5 million (Q2 2023) and $2.2 million (YTD 2023), compared to net income of $51.6 million (Q2 2022) and $37.1 million (YTD 2022)[90] - Accumulated deficit of $413.1 million and cash of $6.9 million as of June 30, 2023[90] - R&D expenses decreased significantly due to cessation of prior activities, with new F351 development costs covered by GNI until business combination closes[94][97] - Gains on disposal of assets: $4.7 million (YTD 2023) from GCBP sale; $57.2 million (YTD 2022) from Vertex sale[99] Results of Operations Financial performance shifted from significant net income in 2022 (due to asset disposals) to net losses in 2023, driven by the absence of large disposal gains and reduced R&D and G&A expenses | Metric | Q2 2023 (in thousands) | Q2 2022 (in thousands) | Change ($) | Change (%) | | :-------------------------- | :--------------------- | :--------------------- | :--------- | :--------- | | R&D Expenses | $318 | $1,871 | $(1,553) | (83)% | | G&A Expenses | $2,225 | $3,844 | $(1,619) | (42)% | | Gain on Disposal of Assets, Net | $0 | $(57,245) | $57,245 | (100)% | | Net Income (Loss) | $(2,472) | $51,632 | $(54,104) | * | | Metric | YTD June 30, 2023 (in thousands) | YTD June 30, 2022 (in thousands) | Change ($) | Change (%) | | :-------------------------- | :------------------------------- | :------------------------------- | :--------- | :--------- | | Collaboration Revenue | $0 | $794 | $(794) | (100)% | | Cost of Collaboration | $0 | $798 | $(798) | (100)% | | R&D Expenses | $906 | $11,574 | $(10,668) | (92)% | | G&A Expenses | $6,195 | $8,838 | $(2,643) | (30)% | | Gain on Disposal of Assets, Net | $(4,736) | $(57,245) | $52,509 | (92)% | | Net Income (Loss) | $(2,212) | $37,096 | $(39,308) | * | - R&D decrease primarily due to $4.4 million in personnel-related costs, $4.1 million in complement-related costs, and $2.1 million in hemophilia-related costs (YTD 2023 vs 2022)[104] - G&A decrease primarily due to $1.7 million in professional services and $0.9 million in personnel-related costs (YTD 2023 vs 2022)[106] Liquidity and Capital Resources As of June 30, 2023, Catalyst had $6.9 million cash and $413.1 million accumulated deficit, facing going concern doubt if preferred stock conversion is not approved, necessitating future financing - Cash and cash equivalents: $6.9 million as of June 30, 2023[112] - Accumulated deficit: $413.1 million as of June 30, 2023[112] - Net cash used in operating activities: $8.7 million for YTD June 30, 2023[115] - Substantial doubt about going concern if stockholder approval for Catalyst Convertible Preferred Stock conversion is not obtained by August 29, 2023, potentially requiring a cash redemption payment exceeding current liquidity[113] - Future cash needs to be financed through divestitures, equity/debt offerings, collaborations, strategic alliances, and licensing arrangements[114] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section is not applicable to the company - Not applicable[122] Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective as of June 30, 2023, with no material changes in internal control over financial reporting - Disclosure controls and procedures evaluated as effective at a reasonable assurance level as of June 30, 2023[123][124] - No material changes in internal control over financial reporting identified during Q2 2023[125] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is not a party to any material legal proceedings - Not a party to any material legal proceedings[127] Item 1A. Risk Factors Significant Nasdaq delisting risk due to non-compliance with minimum bid price and stockholders' equity, potentially impacting stock liquidity, value, and business operations - Received Nasdaq delisting notice for failing Minimum Bid Price Requirement ($1.00 for 30 consecutive trading days) and $2.5 million minimum stockholders' equity requirement[129][130] - Granted until October 30, 2023, to regain compliance with initial listing requirements[130] - Delisting could adversely impact stock liquidity, value, ability to sell equity, and closing of Business Combination Agreement[131] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section is not applicable to the company - Not applicable[132] Item 3. Defaults Upon Senior Securities There are no defaults upon senior securities - None[133] Item 4. Mine Safety Disclosures This section is not applicable to the company - Not applicable[134] Item 5. Other Information No directors or officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during Q2 2023 - No Rule 10b5-1 or non-Rule 10b5-1 trading arrangements adopted or terminated by directors or officers in Q2 2023[135] Item 6. Exhibits Lists filed exhibits, including agreement amendments, waiver agreements, certifications, and XBRL data - Includes amendments to Business Combination Agreement and Asset Purchase Agreement[139] - Includes Contingent Value Rights Agreement and its amendment[139] - Includes certifications of CEO and Interim CFO (Sections 302 and 906 of Sarbanes-Oxley Act)[139][141] - Includes Inline XBRL data for financial statements[141]