glto-10q_20200930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission File Number: 001-39655

 

GALECTO, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

37-1957007

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

Ole Maaloes Vej 3

DK-2200 Copenhagen N

Denmark

N/A

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (+45) 70 70 52 10

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

 

 

 

 

 

Common Stock, par value $0.00001 per share

 

GLTO

 

The Nasdaq Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☐  No  ☒    

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes  ☒    No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes     No   

As of December 10, 2020, the registrant had 25,260,816 shares of common stock, $0.00001 par value per share, outstanding.

 

 

 


Table of Contents

 

 

 

Page

 

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

4

 

Condensed Consolidated Balance Sheets

4

 

Condensed Consolidated Statements of Operations

5

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

6

 

Condensed Consolidated Statements of Cash Flows

7

 

Notes to Unaudited Condensed Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

27

Item 4.

Controls and Procedures

27

 

 

 

 

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

29

Item 1A.

Risk Factors

29

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

79

Item 6.

Exhibits

81

Signatures

82

 


i


Summary of the Material and Other Risks Associated with Our Business

 

Our business is subject to numerous material and other risks and uncertainties that you should be aware of in evaluating our business. These risks include, but are not limited to, the following:

 

We have incurred significant net losses since inception and we expect to continue to incur significant net losses for the foreseeable future.

 

We have a limited operating history, which may make it difficult to evaluate our prospects and likelihood of success.

 

Our business is highly dependent on the success of our lead product candidate, GB0139, as well as GB1211, GB2064 and any other product candidates that we advance into the clinic. All of our product candidates may require significant additional preclinical and clinical development before we may be able to seek regulatory approval for and launch a product commercially.

 

If we encounter difficulties enrolling patients in our clinical trials, our clinical development activities could be delayed or otherwise adversely affected and these delays may cause us to reprioritize our planned trials and use of funds for planned trials.

 

The design or execution of our ongoing and future clinical trials may not support marketing approval.

 

We may not be successful in our efforts to identify or discover additional product candidates in the future.

 

We face substantial competition, which may result in others discovering, developing or commercializing products before or more successfully than we do.

 

Even if we obtain FDA approval of any of our product candidates, we may never obtain approval or commercialize such products outside of the United States, which would limit our ability to realize their full market potential.

 

Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

 

We rely on third parties to conduct certain aspects of our preclinical studies and clinical trials. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or comply with regulatory requirements, we may not be able to obtain regulatory approval of or commercialize any potential product candidates.

 

The global pandemic of the novel coronavirus disease, COVID-19, has, and may continue to, adversely impact our business, including delays to our preclinical studies and clinical trials and these delays may cause us to reprioritize our planned trials and the use of funds for planned trials.

 

There has been no prior public market for our common stock, the stock price of our common stock may be volatile or may decline regardless of our operating performance and you may not be able to resell your shares at or above the initial public offering, or IPO, price.

 

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, stockholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our common stock.

 

The material and other risks summarized above should be read together with the text of the full risk factors below and in the other information set forth in this Quarterly Report, including our consolidated financial statements and the related notes, as well as in other documents that we file with the SEC. If any such material and other risks and uncertainties actually occur, our business, prospects, financial condition and results of operations could be materially and adversely affected. The risks summarized above or described in full below are not the only risks that we face. Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial may also materially adversely affect our business, prospects, financial condition and results of operations.

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical fact are “forward-looking statements” for purposes of this Quarterly Report on Form 10-Q. In some cases, you can identify forward-looking statements by terminology such as “may,” “could,” “will,” “would,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “intend,” “predict,” “seek,” “contemplate,” “project,” “continue,” “potential,” “ongoing,” “goal,” or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements regarding:

 

the success, cost and timing of our product development activities and planned initiation and completion of clinical trials of our lead product candidate, GB0139, as well as our other current product candidates and any future product candidates;

 

our need to raise additional funding before we can expect to generate any revenues from product sales;

 

our ability to obtain regulatory approval for our current or future product candidates that we may identify or develop;

ii


 

our ability to ensure adequate supply of our current or future product candidates;

 

our ability to maintain third-party relationships necessary to conduct our business;

 

our heavy dependence upon the success of our research to generate and advance additional product candidates;

 

our ability to establish an adequate safety or efficacy profile for our current or future product candidates that we may pursue;

 

the implementation of our strategic plans for our business, our current or future product candidates we may develop and our technology;

 

our intellectual property position, including the scope of protection we are able to establish and maintain for intellectual property rights covering our product candidates and technology;

 

the rate and degree of market acceptance and clinical utility for our current or future product candidates we may develop;

 

our estimates about the size of our market opportunity;

 

our ability to use the proceeds of the IPO in ways that increase the value of your investment;

 

our expectations related to the use of proceeds from the IPO, and estimates of our expenses, future revenues, capital requirements and our needs for additional financing;

 

our ability to maintain and establish collaborations;

 

our financial performance and liquidity;

 

our ability to effectively manage our potential growth;

 

developments relating to our competitors and our industry, including the impact of government regulation;

 

our ability to retain the continued service of our key professionals and consultants and to identify, hire and retain additional qualified professionals;

 

the effect of the COVID-19 pandemic, including mitigation efforts and economic effects, on any of the foregoing or other aspects of our business operations and those of our collaborators, service providers and other vendors;

 

our ability to maintain adequate internal controls over financial reporting; and

 

other risks and uncertainties, including those listed under the section titled “Risk Factors.”

 

These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those set forth in Part II, Item 1A - “Risk Factors” below and for the reasons described elsewhere in this Quarterly Report on Form 10-Q. Any forward-looking statement in this Quarterly Report on Form 10-Q reflects our current view with respect to future events and is subject to these and other risks, uncertainties, and assumptions relating to our operations, results of operations, industry, and future growth. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

 

This Quarterly Report on Form 10-Q also contains estimates, projections, and other information concerning our industry, our business, and the markets for certain drugs, including data regarding the estimated size of those markets, their projected growth rates, and the incidence of certain medical conditions. Information that is based on estimates, forecasts, projections, or similar methodologies is inherently subject to uncertainties, and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained these industry, business, market, and other data from reports, research surveys, studies, and similar data prepared by third parties, industry, medical and general publications, government data, and similar sources. In some cases, we do not expressly refer to the sources from which these data are derived.

 

Except where the context otherwise requires, in this Quarterly Report on Form 10-Q, “we,” “us,” “our,” “Galecto,” and the “Company” refer to Galecto, Inc. and, where appropriate, its consolidated subsidiaries.

 

Trademarks

 

We have applied for various trademarks that we use in connection with the operation of our business. This Quarterly Report on Form 10-Q includes trademarks, service marks, and trade names owned by us or other companies. All trademarks, service marks, and trade names included in this Quarterly Report on Form 10-Q are the property of their respective owners. Solely for convenience, the trademarks and trade names in this report may be referred to without the ® and ™ symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto.

 

 

iii


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

GALECTO, INC.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share amounts)

(Unaudited)

 

 

 

September 30,

2020

 

 

December 31,

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

85,333

 

 

$

11,294

 

Prepaid expenses and other current assets

 

 

5,337

 

 

 

5,117

 

Receivable on issuance of convertible preferred stock

 

 

5,473

 

 

 

39,669

 

Total current assets

 

 

96,143

 

 

 

56,080

 

Restricted cash

 

 

241

 

 

 

231

 

Tax credit receivable - noncurrent

 

 

865

 

 

 

 

Operating lease right-of-use asset

 

 

905

 

 

 

298

 

Total assets

 

$

98,154

 

 

$

56,609

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

4,463

 

 

$

3,329

 

Accrued expenses and other current liabilities

 

 

3,818

 

 

 

4,598

 

Total current liabilities

 

 

8,281

 

 

 

7,927

 

Operating lease liabilities, net of current portion

 

 

589

 

 

 

211

 

Total liabilities

 

 

8,870

 

 

 

8,138

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

Convertible preferred stock

 

 

 

 

 

 

 

 

Series B convertible preferred stock, $0.00001 par value;

   684,068 shares authorized, issued and outstanding at September 30, 2020

   and December 31, 2019; liquidation value of $16,545 at September 30, 2020

 

 

13,414

 

 

 

13,414

 

Series C convertible preferred stock, $0.00001 par value; 4,133,479 shares

   authorized at September 30, 2020 and December 31, 2019; 4,125,056 shares

   issued and outstanding at September 30, 2020 and December 31, 2019;

   liquidation value of $121,373 at September 30, 2020

 

 

106,205

 

 

 

106,205

 

Series D convertible preferred stock, $0.00001 par value; 2,368,118 shares

   authorized, issued and outstanding at September 30, 2020; no

   shares authorized, issued or outstanding and December 31, 2019;

   liquidation value of $64,284 at September 30, 2020

 

 

61,402

 

 

 

 

Total convertible preferred stock

 

 

181,021

 

 

 

119,619

 

Stockholders’ deficit

 

 

 

 

 

 

 

 

Common stock, par value of $0.00001 per share; 300,000,000 and 5,350,404 shares

   authorized at September 30, 2020 and December 31, 2019, respectively; 259,966

   shares issued and outstanding as of September 30, 2020 and December 31, 2019

 

 

 

 

 

 

Additional paid-in capital

 

 

1,361

 

 

 

826

 

Accumulated deficit

 

 

(92,783

)

 

 

(69,523

)

Accumulated other comprehensive loss

 

 

(315

)

 

 

(2,451

)

Total stockholders’ deficit

 

 

(91,737

)

 

 

(71,148

)

Total liabilities, convertible preferred stock and stockholders’ deficit

 

$

98,154

 

 

$

56,609

 

 

See accompanying notes to the condensed consolidated financial statements.

4


Galecto, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except share and per share amounts)

(Unaudited)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

7,651

 

 

$

3,674

 

 

$

16,874

 

 

$

11,893

 

General and administrative

 

 

2,515

 

 

 

1,152

 

 

 

5,461

 

 

 

2,224

 

Total operating expenses

 

 

10,166

 

 

 

4,826

 

 

 

22,335

 

 

 

14,117

 

Loss from operations

 

 

(10,166

)

 

 

(4,826

)

 

 

(22,335

)

 

 

(14,117

)

Other income (expense), net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange transaction gain, net

 

 

(1,485

)

 

 

337

 

 

 

(925

)

 

 

669

 

Fair value adjustments on preferred stock tranche obligations

 

 

 

 

 

384

 

 

 

 

 

 

1,364

 

Total other income (expense), net

 

 

(1,485

)

 

 

721

 

 

 

(925

)

 

 

2,033

 

Net loss

 

 

(11,651

)

 

 

(4,105

)

 

 

(23,260

)

 

 

(12,084

)

Dividends on convertible preferred stock

 

 

(2,713

)

 

 

(1,401

)

 

 

(7,648

)

 

 

(4,159

)

Net loss attributable to common stockholders

 

 

(14,364

)

 

 

(5,506

)

 

 

(30,908

)

 

 

(16,243

)

Net loss per common share, basic and diluted

 

$

(55.25

)

 

$

(21.18

)

 

$

(118.89

)

 

$

(62.48

)

Weighted-average number of shares used in computing net loss

   per common share, basic and diluted

 

 

259,966

 

 

 

259,966

 

 

 

259,966

 

 

 

259,966

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

(11,651

)

 

 

(4,105

)

 

 

(23,260

)

 

 

(12,084

)

Currency translation

 

 

2,331

 

 

 

(2,059

)

 

 

2,136

 

 

 

(2,140

)

Total comprehensive loss

 

$

(9,320

)

 

$

(6,164

)

 

$

(21,124

)

 

$

(14,224

)

 

See accompanying notes to the condensed consolidated financial statements.

 

5


 

Galecto, Inc.

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit

(in thousands, except share amounts)

(Unaudited)

 

 

 

Series B

Convertible

Preferred

Stock

 

 

Series C

Convertible

Preferred

Stock

 

 

Series D

Convertible

Preferred

Stock

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Other

Comprehensive

 

 

Accumulated

 

 

Total

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Deficit

 

Balance, January 1, 2019

 

 

684,068

 

 

 

13,414

 

 

 

1,973,203

 

 

 

51,081

 

 

 

 

 

 

 

 

 

 

259,966

 

 

 

 

 

 

826

 

 

 

(1,644

)

 

 

(33,017

)

 

 

(33,835

)

Currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(81

)

 

 

 

 

 

(81

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,978

)

 

 

(7,978

)

Balance, June 30, 2019

 

 

684,068

 

 

$

13,414

 

 

 

1,973,203

 

 

$

51,081

 

 

 

 

 

$

 

 

 

 

259,966

 

 

$

 

 

$

826

 

 

$

(1,725

)

 

$

(40,995

)

 

$

(41,894

)

Currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,059

)

 

 

 

 

 

(2,059

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,105

)

 

 

(4,105

)

Balance, September 30, 2019

 

 

684,068

 

 

$

13,414

 

 

 

1,973,203

 

 

$

51,081

 

 

 

 

 

$

 

 

 

 

259,966

 

 

$

 

 

$

826

 

 

$

(3,784

)

 

$

(45,100

)

 

$

(48,058

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2020

 

 

684,068

 

 

$

13,414

 

 

 

4,125,056

 

 

$

106,205

 

 

 

 

 

$

 

 

 

 

259,966

 

 

$

 

 

$

826

 

 

$

(2,451

)

 

$

(69,523

)

 

$

(71,148

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

401

 

 

 

 

 

 

 

 

 

401

 

Currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(195

)

 

 

 

 

 

(195

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,609

)

 

 

(11,609

)

Balance, June 30, 2020

 

 

684,068

 

 

$

13,414

 

 

 

4,125,056

 

 

$

106,205

 

 

 

 

 

$

 

 

 

 

259,966

 

 

$

 

 

$

1,227

 

 

$

(2,646

)

 

$

(81,132

)

 

$

(82,551

)

Issuance of Series D preferred

   stock, net of issuance costs of

   $2,797

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,368,118

 

 

 

61,402

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

134

 

 

 

 

 

 

 

 

 

134

 

Currency translation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,331

 

 

 

 

 

 

2,331

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11,651

)

 

 

(11,651

)

Balance, September 30, 2020

 

 

684,068

 

 

$

13,414

 

 

 

4,125,056

 

 

$

106,205

 

 

 

2,368,118

 

 

$

61,402

 

 

 

 

259,966

 

 

$

 

 

$

1,361

 

 

$

(315

)

 

$

(92,783

)

 

$

(91,737

)

 

See accompanying notes to the condensed consolidated financial statements.

 

6


GALECTO, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(23,260

)

 

$

(12,084

)

Adjustment to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

507

 

 

 

 

Fair value adjustments on preferred stock tranche obligations and note tranche

   and derivative obligations

 

 

 

 

 

(1,364

)

Amortization of right of use lease asset

 

 

136

 

 

 

81

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(220

)

 

 

33

 

Tax credit receivable - noncurrent

 

 

(865

)

 

 

(804

)

Accounts payable

 

 

1,134

 

 

 

(762

)

Accrued expenses and other current liabilities

 

 

(1,019

)

 

 

908

 

Operating lease liabilities

 

 

(99

)

 

 

(81

)

Net cash used in operating activities

 

 

(23,686

)

 

 

(14,073

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from issuance of Series C preferred stock

 

 

39,669

 

 

 

 

Proceeds from issuance of Series D preferred stock

 

 

58,727

 

 

 

 

Series D preferred stock issuance costs

 

 

(2,797

)

 

 

 

Net cash provided by financing activities

 

 

95,599

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

71,913

 

 

 

(14,073

)

Effect of exchange rate changes on cash and cash equivalents

 

 

2,136

 

 

 

(2,140

)

Cash, cash equivalents and restricted cash, beginning of period

 

 

11,525

 

 

 

31,131

 

Cash, cash equivalents and restricted cash, end of period

 

$

85,574

 

 

$

14,918

 

Components of cash, cash equivalents, and restricted cash

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

85,333

 

 

 

14,695

 

Restricted cash

 

 

241

 

 

 

223

 

Total cash, cash equivalents and restricted cash

 

$

85,574

 

 

$

14,918

 

Supplemental disclosures of noncash activities

 

 

 

 

 

 

 

 

Receivable on issuance of Series D preferred stock

 

$

5,473

 

 

$

 

Operating lease liabilities arising from obtaining right-of-use assets

 

$

672

 

 

$

391

 

Cumulative effect of change in accounting principle—adoption of ASC 842, Leases

 

$

 

 

$

15

 

 

See accompanying notes to the condensed consolidated financial statements.

7


GALECTO, INC.

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

1. DESCRIPTION OF BUSINESS, ORGANIZATION AND LIQUIDITY

Business

Galecto, Inc., together with its consolidated subsidiaries, the Company or Galecto, is a clinical-stage biotechnology company developing therapeutics that are designed to target the biological processes that lie at the heart of fibrosis and impact a broad range of fibrotic and related diseases, including cancer. The Company’s initial focus is on the development of small-molecule inhibitors of galectin-3 and lysyl oxidase-like 2, or LOXL2, which play key roles in regulating fibrosis.

Reorganization and Purchase of PharmAkea, Inc.

Galecto, Inc. was incorporated in Delaware in October 2019. On December 31, 2019, as part of an integrated transaction, Galecto, Inc., Galecto Biotech AB, a Swedish operating company, and PharmAkea, Inc., or PharmAkea, consummated a purchase agreement and plan of merger by and among Galecto, Inc., Galecto Biotech AB and PharmAkea, or the Purchase, whereby Galecto, Inc. (i) acquired the shareholdings of Galecto Biotech AB via a one-for-one exchange of equity between Galecto, Inc. and the shareholders of Galecto Biotech AB in a common control reorganization, and (ii) acquired PharmAkea in principally an all-stock transaction.

As of September 30, 2020, the Company’s wholly-owned subsidiaries were PharmAkea and Galecto Biotech AB, and Galecto Biotech ApS, a Danish operating company, was Galecto Biotech AB’s wholly-owned subsidiary. The condensed consolidated balance sheets as of September 30, 2020 and December 31, 2019 are that of Galecto, Inc. The condensed consolidated statements of operations and comprehensive loss, convertible preferred shares and stockholders’ deficit and cash flows for the nine months ended September 30, 2020 are that of Galecto, Inc. and for the nine months ended September 30, 2019 are that of Galecto Biotech AB. As used in these condensed consolidated financial statements, unless the context otherwise requires, references to Galecto or the Company, refers to the consolidated Galecto, Inc. group.

Liquidity and management plans

Since inception, the Company has devoted substantially all its efforts to business planning, research and development, recruiting management and technical staff, and raising capital and has financed its operations primarily through the issuance of redeemable convertible preferred shares, debt financings and, most recently, the Company’s initial public offering, or IPO.

The Company is subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including, but not limited to, development by competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations and ability to secure additional capital to fund operations. Product candidates currently under development will require significant additional research and development efforts, including extensive preclinical and clinical testing and regulatory approval prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel and infrastructure and extensive compliance-reporting capabilities. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will realize significant revenue from product sales.

The Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern within one year after the date the condensed consolidated financial statements are issued. As of September 30, 2020, the Company had an accumulated deficit of $92.8 million, from recurring losses since inception in 2011. The Company has incurred recurring losses and has no sales as no products have obtained the necessary regulatory approval in order to market products. The Company expects to continue to incur losses as a result of costs and expenses related to the Company’s clinical development and corporate general and administrative activities. The Company had negative cash flows from operating activities during the nine months ended September 30, 2020 of $23.7 million, and current projections indicate that the Company will have continued negative cash flows for the foreseeable future as it continues to develop its product candidates. Net losses incurred for the nine months ended September 30, 2020 and year ended December 31, 2019, amounted to $23.3 million and $36.5 million, respectively.

The Company currently expects that its cash and cash equivalents of $85.3 million as of September 30, 2020, together with the net proceeds from the IPO, after deducting underwriting discounts, commissions and offering costs, of $85.7 million in October 2020, which includes 675,540 shares issued upon the partial exercise of the underwriters in November 2020 of their option to purchase additional shares of common stock, will be sufficient to fund its operating expenses and capital requirements for more than

8


12 months from the date the condensed consolidated financial statements are issued. However, additional funding will be necessary to fund future clinical and pre-clinical activities, which cannot be assured. If the Company is unable to obtain funding, it could be forced to delay, reduce or eliminate its research and development programs, product portfolio expansion or commercialization efforts, which could adversely affect its business prospects and its ability to continue operations.

Coronavirus pandemic

The coronavirus disease 2019, or COVID-19, pandemic, which began in December 2019 and has spread worldwide, has caused many governments to implement measures to slow the spread of the outbreak through quarantines, travel restrictions, heightened border scrutiny and other measures. The outbreak and government measures taken in response have also had a significant impact, both directly and indirectly, on businesses and commerce, as worker shortages have occurred; supply chains have been disrupted; facilities and production have been suspended; and demand for certain goods and services, such as medical services and supplies, has spiked, while demand for other goods and services, such as travel, has fallen. The future progression of the outbreak and its effects on the Company’s business and operations are uncertain.

In response to the impact of COVID-19, the Company has implemented certain measures intended to help the Company manage its impact and position the Company to resume operations quickly and efficiently once these restrictions are lifted, such as executing a work-from-home strategy for administrative functions and operations.

Despite the Company’s implementation of such measures, the actual and perceived impact of the COVID-19 pandemic is changing daily, and its ultimate effect on the Company cannot be predicted. As a result, there can be no assurance that the Company will not experience additional negative impacts associated with COVID-19, which could be significant. The COVID-19 pandemic may negatively impact the Company’s business, financial condition and results of operations by decreasing or delaying the enrollment of patients in the Company’s clinical trials or otherwise causing interruptions or delays in the Company’s programs and services.

On March 27, 2020, the United States enacted the Coronavirus Aid, Relief and Economic Security Act, or CARES Act. The CARES Act is an emergency economic stimulus package that includes spending and tax breaks to strengthen the United States economy and fund a nationwide effort to curtail the effect of COVID-19. The CARES Act provides sweeping tax changes in response to the COVID-19 pandemic, some of the more significant provisions include removing certain limitations on the utilization of certain limitations on utilization of net operating losses, increasing the loss carryback period for certain losses to five years, increasing the ability to deduct interest expense, and deferring social security payments, as well as amending certain provisions of the previously enacted Tax Cuts and Jobs Act. The Company does not believe the CARES Act will have a material impact on its financial position and results of operations.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

There have been no changes to the significant accounting policies as disclosed in Note 2 to the Company’s annual consolidated financial statements for the years ended December 31, 2019 included in the final prospectus for the Company’s IPO filed pursuant to Rule 424(b)(4) under the Securities Act with the SEC on October 30, 2020.

 


9


Unaudited Financial Information

The Company’s condensed consolidated financial statements included herein have been prepared in conformity with U.S. GAAP and pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. In the Company’s opinion, the information furnished reflects all adjustments, all of which are of a normal and recurring nature, necessary for a fair presentation of the financial position and results of operations for the reported interim periods. The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year or any other interim period.

Recently adopted accounting standards

During August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, or ASU 2018-13. ASU 2018-13 modifies the disclosure requirements for fair value measurements in Topic 820, Fair Value Measurement. The amendments are based on the concepts in the FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements, which the Board finalized on August 28, 2018. ASU 2018-13 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019. The adoption of ASU 2018-13 on January 1, 2020 did not have a material impact on the financial statements.

3. FAIR VALUE MEASUREMENTS

The Company had no financial assets or liabilities measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019. The Company had a Preferred Stock Tranche Obligation (Note 9) measured at (Level 3) fair value on a recurring basis of $1.7 million as of December 31, 2018. There were no transfers among Level 1, Level 2 or Level 3 categories for the nine months ended September 30, 2020 and the year ended December 31, 2019.

The following table provides a reconciliation of the Company’s liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):

 

 

 

Nine Months Ended

 

 

 

September 30, 2019

 

Balance at January 1, 2019

 

$

1,744

 

Fair value adjustments

 

$

(980

)

Balance at June 30, 2019

 

$

764

 

Fair value adjustments

 

$

(384

)

Balance at September 30, 2019

 

$

380

 

 

Preferred stock tranche obligation

The Company’s Preferred Stock Tranche Obligation (Note 9) is measured at fair value using an option pricing valuation methodology. The fair value of Preferred Stock Tranche Obligation includes inputs not observable in the market and thus represents a Level 3 measurement. The option methodology utilized requires inputs based on certain subjective assumptions, including (a) expected stock price volatility, (b) calculation of an expected term, (c) a risk-free interest rate, and (d) expected dividends. This approach results in the classification of these securities as Level 3 of the fair value hierarchy. The Company had no Preferred Stock Tranche Obligation as of December 31, 2019. The assumptions utilized to value the Preferred Stock Tranche Obligation as of September 30, 2019 were (a) expected stock price volatility of 73%; (b) expected term of 2.3 years: (c) a risk-free interest rate of 1.7%; and (d) an expectation of no dividends. For the nine months ended September 30, 2019, the Company recognized a $1.4 million nonoperating gain in the statement of operations as fair value adjustments on preferred stock tranche obligations, with respect to changes to the fair value of the Preferred Stock Tranche Obligation.

4. PURCHASE OF PHARMAKEA, INC.

The Purchase was principally an all-stock transaction whereby the Company exchanged 610,098 shares of its Series C-3 preferred stock, or approximately 13% of the shares of the Company subsequently outstanding, for PharmAkea. The Company was determined to be the accounting acquirer, and the Purchase of PharmAkea has been accounted for as an asset acquisition pursuant to Topic 805, Business Combinations, as the principal asset acquired was PharmAkea’s Phase 1 clinical development program of an orally delivered inhibitor of LOXL2 for the treatment of Myelofibrosis and other fibrotic indications, which the Company refers to as GB2064. At the time of the Purchase, PharmAkea had no facilities, employees, customers or assets other than the GB2064 program.

10


The following summarizes the purchase price of the Purchase (in thousands, except share and per share amounts):

 

Value of the shares of Series C preferred stock issued to former

   PharmAkea stockholders

 

$

15,625

 

Cash consideration to non-accredited former PharmAkea

   stockholders

 

 

216

 

Payments made and Company options issued to former

   PharmAkea executives pursuant to the terms of the

   Purchase

 

 

583

 

Transaction costs

 

 

978

 

Purchase price

 

$

17,402

 

 

The total purchase price has been allocated to the assets acquired and liabilities assumed as of December 31, 2019 as follows (in thousands):

 

Purchased in-process research and development—GB2064

 

$

16,788

 

Cash acquired

 

 

653

 

Trade liabilities assumed

 

 

(39

)

Purchase price

 

$

17,402

 

 

Purchased in-process research and development with respect to GB2064 is charged directly to expense in the consolidated statements of operations on the purchase date, December 31, 2019. The value of GB2064 consists primarily of technology associated with the drug compound that the Company plans to advance in clinical development but as of the date of the Purchase was in early stages of clinical development, had not received regulatory approval to commercialize and, thus, had no alternative future use.

The fair value of GB2064 was determined under a multi-period excess earnings method, or MPEEM, and income approach and a variation of the discounted cash flow method used to measure the fair value of intangible assets. The MPEEM fair value is a risk-adjusted assessment of the market potential of GB2064 for the treatment of Myelofibrosis, discounted using a calculated market participant weighted average cost of capital of 45%.

5. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of the following (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Contract research and development costs

 

$

2,937

 

 

$

3,344

 

Research and development tax credit receivable

 

 

863

 

 

 

827

 

Deferred offering costs

 

 

676

 

 

 

 

Grant reimbursement receivable

 

 

 

 

 

379

 

Value-added tax refund receivable

 

 

573

 

 

 

253

 

Other

 

 

288

 

 

 

314

 

Total prepaid expenses and other current assets

 

$

5,337

 

 

$

5,117

 

 

6. LEASES

On January 1, 2019, the Company adopted ASC 842 using the modified retrospective transition approach allowed under ASU 2018-11 which releases companies from presenting comparative periods and related disclosures under ASC 842 and requires a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption (Note 2). The Company is party to three operating leases for office and laboratory space. The Company’s finance leases are immaterial both individually and in the aggregate. The Company has elected to apply the short-term lease exception to all leases of one year or less. Rent expense for the nine months ended September 30, 2020 and 2019 was $209,000 and $154,000, respectively, and for the three months ended September 30, 2020 and 2019 was $77,000 and $66,000, respectively.

The Company had an operating lease in Woburn Place, London for office space that expired in August 2020. The Company has an operating lease in Denmark for office space that expires in October 2021 and has a renewal option. The Company also had an operating lease for office space in Canada that expired in July 2020. Effective September 1, 2020, the Company added an additional 1,300 square feet of office space to its corporate headquarters in Copenhagen and amended the related lease agreement to

11


include this additional space. The Company also entered into a new lease for 749 square feet of office space in London commencing September 1, 2020 and expiring August 31, 2022.

Quantitative information regarding the Company’s leases for the nine months ended September 30, 2020 and 2019 is as follows (in thousands):

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

Lease Cost

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Operating lease cost

 

$

65

 

 

$

30

 

 

$

136

 

 

$

94

 

Other Information

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating cash flows paid for amounts included

   in the measurement of lease liabilities

 

$

67

 

 

$

29

 

 

$

136

 

 

$

92

 

Operating lease liabilities arising from obtaining

   right-of-use assets

 

$

420

 

 

$

 

 

$

672

 

 

$

391

 

Weighted average remaining lease term (years)

 

3.1

 

 

4.4

 

 

3.1

 

 

4.4

 

Weighted average discount rate%

 

 

8.0

 

 

 

8.0

 

 

 

8.0

 

 

 

8.0

 

 

Future lease payments under noncancelable leases are as follows at September 30, 2020 (in thousands):

 

 

 

Operating

 

Future Lease Payments

 

Leases

 

2020

 

$

94

 

2021

 

 

377

 

2022

 

 

298

 

2023

 

 

139

 

2024

 

 

116

 

Total lease payments

 

 

1,024

 

Less: imputed interest

 

 

(119

)

Total lease liabilities

 

$

905

 

 

As most of the Company’s leases do not provide an implicit rate, the Company used its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company used the incremental borrowing rate on January 1, 2019 for operating leases that commenced prior to that date.

7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consist of the following (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Contract research and development costs

 

$

1,274

 

 

$

3,493

 

Costs related to the Purchase of PharmAkea

 

 

0

 

 

 

838

 

Employee compensation costs

 

 

1,281

 

 

 

113

 

Lease liabilities

 

 

316