CATALYST BIOSCIENCES The following discussion and analysis should be read in conjunction with Catalyst's consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties, including those set forth under the heading "Risk Factors" and elsewhere in this Annual Report on Form 10-K. Actual results and the timing of selected events discussed below could differ materially from those expressed in, or implied by, these forward-looking statements.
Overview
F351 Asset Acquisition
OnDecember 26, 2022 , Catalyst acquired the F351 Assets from GNI Group Ltd. andGNI Hong Kong Limited (the "Sellers") pursuant to that certain F351 Agreement, by and among Catalyst and the Sellers. The F351 Assets include 15 issued or pending patents and patent applications outside of the PRC, with the last acquired issued patent expected to expire inAugust 2037 . Under the terms of the F351 Agreement and upon the effective time of the transactions contemplated by the F351 Agreement, Catalyst issued to the Sellers equity interests with an aggregate value of$35.0 million in the form of: 6,266,521 shares of the Company's common stock and 12,340 shares of newly designated Series X convertible preferred stock ("Catalyst Convertible Preferred Stock"), which Catalyst Convertible Preferred Stock is convertible, upon the approval of the stockholders of Catalyst (as further described herein) into shares of common stock at a ratio of one (1) share of Catalyst Convertible Preferred Stock to 10,000 shares of common stock. Subject to stockholder approval, each share of Catalyst Convertible Preferred Stock issued under the F351 Agreement is convertible into 10,000 shares of common stock. Pursuant to the F351 Agreement, Catalyst has agreed to hold a stockholders' meeting, which is expected to be held in the third quarter of 2023, to submit the following matters to the Company's stockholders for their consideration: (i) the approval of the conversion of the Catalyst Convertible Preferred Stock into shares of common stock in accordance with Nasdaq rules, or the Conversion Proposal, and (ii) if necessary or appropriate, the approval of an amendment to Catalyst's certificate of incorporation to authorize sufficient shares of common stock for the conversion of the Catalyst Convertible Preferred Stock issued pursuant to the F351 Agreement. Following stockholder approval of the Conversion Proposal, each share of Catalyst Convertible Preferred Stock is convertible into shares of the Company's common stock at any time at the option of the holder thereof, into 10,000 shares of its common stock, subject to certain limitations, including that a holder of Catalyst Convertible Preferred Stock is prohibited from converting shares of Catalyst Convertible Preferred Stock into shares of its common stock if, as a result of such conversion, such holder, together with its affiliates, would beneficially own more than a specified percentage (to be initially set at 9.99% and thereafter adjustable by the holder to a number between 4.99% and 19.99%) of the total number of shares of Catalyst's common stock issued and outstanding immediately after giving effect to such conversion.
Business Combination Agreement
OnDecember 26, 2022 , Catalyst, the Contributors, the Minority Holders and CPI entered into the Business Combination Agreement. The Business Combination Agreement contains the terms and conditions of the proposed business combination pursuant to which Catalyst will acquire an indirect controlling interest in BC. The closing of the Business Combination Agreement will be subject to stockholder approval at a stockholder meeting expected to be held in the third quarter of 2023 and certain customary closing conditions. If the transaction is approved by stockholders, Catalyst would issue at closing a total of up to 1,110,776,224 shares of its common stock for an indirect controlling interest in BC. The Business Combination Agreement contains certain termination rights, including the right for it to terminate the Business Combination Agreement to enter into a definitive agreement for a superior proposal. Upon termination of the Business Combination Agreement under specified circumstances, Catalyst may be required to pay a termination fee of$2.0 million and either party, as the case may be, may be required to reimburse the other party for reasonable out-of-pocket fees and expenses incurred by such party in connection with the Business Combination Agreement, up to a maximum amount of$2.0 million . 61 --------------------------------------------------------------------------------
Contingent Value Rights Agreement
Concurrent with the signing of the Business Combination Agreement, Catalyst entered into the CVR Agreement, pursuant to which each CVR Holder, excluding GNI, received one CVR issued by the Company, subject to and in accordance with the terms and conditions of the CVR Agreement, for each share of its common stock held by such holder at the CVR Record Date. Each CVR entitles the holder thereof to receive (i) certain cash payments from the net proceeds, if any, related to (a) the disposition of its legacy assets within 90 calendar days after the remainder of the Holdback Amount (as defined in the CVR Agreement) is finally determined and received by Catalyst or (b) the resolution of certain legal claims; provided, however, such period will be automatically extended for any Claim (as defined in the CVR Agreement) for an additional one-year period to the extent any Claim is appealed during the initial term, (ii) 100% of the excess cash (net of all current or contingent liabilities, including transaction-related expenses) retained by the Company in excess of$1.0 million as of the closing date of the Business Combination Agreement, and (iii) 100% of the amount actually received (net of indemnity claims, if any) by Catalyst pursuant to the asset purchase agreement dated as ofMay 19, 2022 , by and between Catalyst and Vertex. The contingent payments under the CVR Agreement, if they become payable, will become payable to the Rights Agent (as defined in the CVR Agreement) for subsequent distribution to the CVR Holders. In the event that no such proceeds are received, or the permitted deductions under the CVR Agreement are greater than any such proceeds, CVR Holders will not receive any payment pursuant to the CVR Agreement. There can be no assurance that CVR Holders will receive any amounts. The CVRs are not transferable, except in certain limited circumstances as provided for in the CVR Agreement, will not be certificated or evidenced by any instrument, and will not be registered with theSEC or listed for trading on any exchange. Prior to the F351 acquisition, Catalyst was engaged in the research and development of product candidates from Catalyst's protein engineering platform. InFebruary 2022 , Catalyst announced that it engaged Perella Weinberg Partners as a financial advisor to assist Catalyst in exploring strategic alternatives to monetize its assets. InMarch 2022 , Catalyst ceased research and development activities and inMay 2022 , Catalyst entered into an asset purchase agreement with Vertex, pursuant to which Vertex purchased Catalyst's complement portfolio, including CB 2782-PEG and CB 4332, as well as its complement-related intellectual property, including the ProTUNE™ and ImmunoTUNE™ platforms, for$60.0 million in cash consideration.$55.0 million was received upfront and the remaining$5.0 million was retained by Vertex as a hold-back until one year after the closing date to satisfy certain post-closing indemnification obligations. Any amounts received from Vertex with respect to this hold-back will be distributed to the CVR Holders. OnFebruary 27, 2023 , Catalyst signed an asset purchase agreement withGC Biopharma Corp. ("GCBP") pursuant to which GCBP acquired Catalyst's legacy rare bleeding disorders programs including marzeptacog alpha activated ("MarzAA"), dalcinonacog alpha ("DalcA") and CB-2679d-GT for a total of$6.0 million ,$1.0 million payable on signing and$5.0 million payable onFebruary 28, 2025 , subject to satisfaction of post-closing indemnification obligations. InMarch 2023 , Catalyst distributed net proceeds of approximately$0.2 million to the CVR Holders. Once received, any additional net proceeds from the transaction will be distributed to the CVR Holders. Catalyst is also pursuing certain legal claims against a third party related to payments under a 2016 asset purchase agreement, and any net recoveries related to these claims will be distributed to the CVR Holders.
Financial Operations Overview
Catalyst has no drug products approved for commercial sale and has not generated any revenue from drug product sales.
Catalyst has never been profitable and has incurred significant operating losses in each year since inception. Catalyst had net losses of$8.2 million and$87.9 million for the years endedDecember 31, 2022 and 2021, respectively. As ofDecember 31, 2022 , Catalyst had an accumulated deficit of$410.9 million . As ofDecember 31, 2022 , its cash and cash equivalents balance was$21.7 million . Substantially all its operating losses were incurred in its research and development programs and in its general and administrative operations.
License and Collaboration Revenue
License and collaboration revenue consists of revenue earned for performance obligations satisfied pursuant to the License and Collaboration Agreement with Biogen entered into inDecember 2019 and terminated inMay 2022 (the "Biogen Agreement"). Catalyst recognized collaboration revenue for reimbursable third-party vendor, out-of-pocket 62 --------------------------------------------------------------------------------
and personnel costs pertaining to the Biogen Agreement, of
Catalyst has not generated any revenue from the sale of any drug products and Catalyst does not expect to generate any revenue from the sale of drug products until Catalyst obtains regulatory approval of and commercialize its product candidates.
Cost of License and Collaboration Revenue
Cost of license and collaboration revenue consists of fees for research and development services payable to third-party vendors and personnel costs, corresponding to the recognition of license and collaboration revenue from Biogen. Cost of license and collaboration revenue does not include any allocated overhead costs. Catalyst recognized third-party vendor, out-of-pocket and personnel costs, most of which were reimbursable, pertaining to the Biogen Agreement of$0.8 million and$7.4 million during the years endedDecember 31, 2022 and 2021, respectively, and recorded such costs as cost of collaboration revenue.
Acquired in-process research and development ("IPR&D") expense resulted from the
acquisition of the F351 Assets in December 2022 . The acquisition costs allocated
to acquire IPR&D with no alternative future use was recorded as an expense at
the acquisition date.
Research and Development Expenses
As ofMarch 2022 , Catalyst ceased the development of certain programs and during the quarter endedJune 30, 2022 , Catalyst ceased all research and development activities. Research and development expenses represent costs incurred to conduct research, such as the discovery and development of its product candidates. Catalyst recognizes all research and development costs as they are incurred. Nonrefundable advance payments for goods or services used in research and development are deferred and capitalized. 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.
Research and development expenses have traditionally consisted primarily of the following:
• employee-related expenses, which include salaries, benefits and stock-based
compensation;
• laboratory and vendor expenses, including payments to consultants and third
parties, related to the execution of preclinical, non-clinical and clinical
studies;
• the cost of acquiring and manufacturing preclinical and clinical materials
and developing manufacturing processes;
• clinical trial expenses, including costs of third-party clinical research
organizations;
• performing toxicity and other preclinical studies; and
• facilities and other allocated expenses, which include direct and allocated
expenses for rent and maintenance of facilities, depreciation and
amortization expense and other supplies.
The table below details its internal and external costs for research and
development for the period presented, excluding the acquired IPR&D (in
thousands). See "Current Product Development Plans" included elsewhere in this
Annual Form 10-K for further discussion of the current research and development
programs.
Year Ended December 31,
2022 2021
Hemophilia $ 2,433 $ 25,791
Complement 4,139 24,698
Personnel and other 6,135 17,198
Stock-based compensation 330 1,202
Total research and development expenses (excluding IPR&D)
$ 68,889 63
-------------------------------------------------------------------------------- The largest component of total operating expenses had historically been Catalyst's investment in research and development activities, including the clinical and manufacturing development of its product candidates. Costs listed for its hemophilia and complement programs above consist of clinical trial, manufacturing and research costs. Its internal resources, employees and infrastructure, identified above as personnel and other, are generally not directly tied to individual product candidates or development programs. As such, Catalyst does not maintain information regarding these costs incurred for these research and development programs on a project-specific basis.
Since Catalyst has ceased its research and development activities, Catalyst expects its aggregate research and development expenses will continue after the Business Combination Agreement.
General and Administrative Expenses
General and administrative expenses consist of personnel costs, allocated expenses, expenses for outside professional services, including legal, human resources, audit and accounting services, and other general expenses. Personnel costs consist of salaries, bonuses, benefits and stock-based compensation. Catalyst incurs expenses associated with operating as a public company, including expenses related to compliance with the rules and regulations of theSEC and Nasdaq, insurance expenses, audit expenses, investor relations activities, Sarbanes-Oxley compliance expenses and other administrative expenses and professional services. Gain on Disposal of Assets
Gain on disposal of assets resulted from the sale of Catalyst's complement
portfolio and related intellectual property to Vertex in
Results of Operations
The following table set forth its results of operations data for the periods
presented (in thousands):
Year Ended December 31,
2022 2021 Change ($) Change (%)
Revenue:
Collaboration $ 794 $ 7,338 $ (6,544 ) (89 )%
Operating expenses (income):
Cost of collaboration 798 7,380 (6,582 ) (89 )%
Research and development 13,037 68,889 (55,852 ) (81 )%
General and administrative 17,366 18,963 (1,597 ) (8 )%
Acquired in-process research and development 35,390 - 35,390 *
Gain on disposal of assets, net (57,186 ) - (57,186 ) *
Total operating expenses 9,405 95,232 (85,827 ) (90 )%
Loss from operations (8,611 ) (87,894 ) 79,283 (90 )%
Interest and other income (expense), net 717 (39 ) 756 *
Loss before income taxes (7,894 ) (87,933 ) 80,039 (91 )%
Income tax expenses 348 - 348 *
Net loss $ (8,242 ) $ (87,933 ) $ 79,691 (91 )%
*Not meaningful
License and Collaboration Revenue
License and collaboration revenue for the years ended
Cost of License and Collaboration
Cost of license and collaboration revenue for the years ended
64
--------------------------------------------------------------------------------Research and Development Expenses
Research and development expenses, excluding the acquired IPR&D, were$13.0 million and$68.9 million during the years endedDecember 31, 2022 and 2021, respectively, a decrease of approximately$55.9 million , or 81%. The decrease was due primarily to a decrease of$23.4 million in hemophilia-related costs, a decrease of$20.5 million in complement-related costs, a decrease of$11.1 million in personnel-related costs, and a decrease of$0.9 million in stock-based compensation costs. Research and development expenses for the year endedDecember 31, 2022 include approximately$0.6 million of severance and other costs related to its reduction-in-force.
General and Administrative Expenses
General and administrative expenses were$17.4 million and$19.0 million during the years endedDecember 31, 2022 and 2021, respectively, a decrease of approximately$1.6 million , or 8%. The decrease was due primarily to a decrease of$2.1 million in professional services, a decrease of$2.1 million in personnel-related costs, partially offset by an increase of$2.2 million in facilities and other administrative costs, which primarily related to transaction costs incurred in connection with the Business Combination Agreement and costs related to the Company's operating leases, an increase of$0.2 million related to the Company's allowance for doubtful accounts, and a net increase of$0.2 million related to settlements reached with Biogen and certain contract service vendors. General and administrative expenses for the year endedDecember 31, 2022 include approximately$0.4 million of severance and other costs related to its reduction-in-force.
Acquired IPR&D was$35.4 million for the year endedDecember 31, 2022 , which related to the acquisition of the F351 Assets inDecember 2022 . The acquisition cost allocated to acquire IPR&D with no alternative future use was recorded as an expense at the acquisition date. No acquired IPR&D expenses were incurred in 2021.
Gain on Disposal of Assets, Net
Gain on disposal of assets, net was$57.2 million for the year endedDecember 31, 2022 , which primarily consisted of a$57.4 million gain related to the sale of its complement portfolio to Vertex inMay 2022 .
Interest and Other Income (Expense), Net
The$0.8 million increase in interest and other income (expense), net for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 was primarily due to a$0.2 million gain recognized upon the extinguishment of a liability and an increase in interest income.
Recent Accounting Pronouncements
Refer to Note 3, Summary of Significant Accounting Policies, to Catalyst's consolidated financial statements included within Item 8 of this Annual Report on Form 10-K for a description of recent accounting pronouncements adopted and not yet adopted for the year endedDecember 31, 2022 .
Liquidity and Capital Resources
OnSeptember 20, 2022 , Catalyst paid a special, one-time cash dividend of$1.43 per share, or approximately$45.0 million , to holders of the Company's common stock. OnDecember 27, 2022 , Catalyst declared another special cash dividend of$0.24 per share, or approximately$7.6 million , to holders of the Company's common stock, excluding GNI, which was paid onJanuary 12, 2023 . As ofDecember 31, 2022 , Catalyst had$21.7 million of cash and cash equivalents. During the year endedDecember 31, 2022 , Catalyst had a$8.2 million net loss and$33.1 million cash used in operating activities. Catalyst has an accumulated deficit of$410.9 million as ofDecember 31, 2022 . Catalyst expects that its existing cash and cash equivalents are sufficient to support its operating expenses through 2023, assuming the Company's stockholders approve the Conversion Proposal. Catalyst's estimate as to how long the Company expects its cash and cash equivalents to be able to fund its operations is based on assumptions that may prove to be wrong, and it could use the Company's available capital resources sooner than it currently expects. Further, changing circumstances, some of 65 --------------------------------------------------------------------------------
which may be beyond Catalyst's control, could cause it to consume capital significantly faster than currently anticipated, and the Company may need to seek additional funds sooner than planned.
In connection with the F351 Agreement, Catalyst issued Catalyst Convertible
Preferred Stock to GNI. Catalyst is obligated to seek stockholder approval for
the conversion of the Catalyst Convertible Preferred Stock into common stock. In
the event that the Company fails to timely hold the stockholders' meeting or
fails to obtain stockholder approval of the Conversion Proposal, then the
holders of the Catalyst Convertible Preferred Stock would be entitled to require
Catalyst to redeem, in cash, the shares of common stock underlying its Catalyst
Convertible Preferred Stock at a price per share equal to the fair value of the
common stock. If Catalyst is forced to redeem a significant amount of shares
underlying the Catalyst Convertible Preferred Stock, it could, among other
things, materially affect the Company's results of operations and cash usage
forecasts, require Catalyst to raise additional capital and impact its ability
to raise additional capital. Also, while Catalyst cannot predict the amount with
any level of certainty, there is a level of cash settlement at which, if it is
exceeded, could require Catalyst to make redemption payments in excess of its
current liquidity. Catalyst believes that its stockholders who are entitled to
vote on the Conversion Proposal at its 2023 Annual Meeting of Stockholders,
which is expected to be held in the third quarter of 2023, will vote to approve
the proposal. However, as the vote of the Company's stockholders is outside of
its control, there is substantial doubt about Catalyst's ability to continue as
a going concern within one year from the filing of this Annual Report on Form
10-K.
Catalyst expects to finance any future cash needs through a combination of
divestitures of its product candidates or other assets, equity offerings, debt
financings, collaborations, strategic alliances and licensing arrangements.
There can be no assurance as to the timing, terms or consummation of any
divestiture or financing, and the terms of any such financing may adversely
affect the Company's stockholders' rights. If Catalyst raises funds through
collaborations, strategic alliances or licensing arrangements with third
parties, it may have to relinquish valuable rights to its technologies, product
candidates or to grant licenses on terms that may not be favorable to the
Company.
The following table summarizes its cash flows for the periods presented (in
thousands):
Year Ended December 31,
2022 2021
Cash used in operating activities $ (33,096 ) $ (83,755 )
Cash provided by investing activities 55,426 48,189
Cash (used in) provided by financing activities (45,011 )
49,553
Net (decrease) increase in cash and cash equivalents
13,987
Cash Flows from Operating Activities
Cash used in operating activities for the year endedDecember 31, 2022 was$33.1 million . The most significant component of its cash used was a net loss of$8.2 million . The net loss included the net gain of$57.2 million from the sale of its complement portfolio and other assets, offset by non-cash expense primarily related to IPR&D of$35.4 million that resulted from the acquisition of the F351 Assets inDecember 2022 in exchange for shares of the Company's stock, stock-based compensation of$1.3 million , bad debt expense of$0.2 million , and depreciation and amortization of$0.2 million . In addition, net cash outflow of$4.9 million was attributable to the change in its net operating assets and liabilities primarily as a result of a$6.2 million decrease in accounts payable, and a$1.9 million decrease in accrued compensation and other accrued liabilities, partially offset by a$1.6 million decrease in accounts and other receivables and a$1.6 million decrease in prepaid and other current assets. Cash used in operating activities for the year endedDecember 31, 2021 was$83.8 million . The most significant component of its cash used was a net loss of$87.9 million . This included non-cash expenses related to stock-based compensation of$3.4 million and depreciation and amortization of$0.3 million . In addition, cash inflow of$0.5 million was attributable to the change in its net operating assets and liabilities primarily as a result of a$3.9 million decrease in prepaid and other assets, a$1.5 million decrease in accounts receivable, and a$0.5 million increase in accounts payable, offset by a$3.7 million decrease in accrued compensation and other accrued liabilities and a$1.8 million decrease in deferred revenue related to the Biogen Agreement. 66 --------------------------------------------------------------------------------
Cash Flows from Investing Activities
Cash provided by investing activities for the year endedDecember 31, 2022 was$55.4 million , due to$55.0 million in cash proceeds from the sale of its complement portfolio to Vertex,$2.5 million due to proceeds from maturities of investments, and$0.5 million in proceeds from the sale of property and equipment, partially offset by$2.6 million in transaction costs related to the sale of its complement portfolio to Vertex. Cash provided by investing activities for the year endedDecember 31, 2021 was$48.2 million , due to$49.0 million in proceeds from maturities of investments, offset by$0.8 million used in purchases of property and equipment.
Cash Flows from Financing Activities
Cash used in financing activities for the year endedDecember 31, 2022 was$45.0 million , due to the special dividend issued and paid inSeptember 2022 , offset by the issuance of a minimal amount of stock grants and option exercises. Cash provided by financing activities for the year endedDecember 31, 2021 was$49.6 million , due to$49.3 million in net proceeds from the issuance of common stock related to its public offering in the first quarter of 2021 and$0.3 million in proceeds from ESPP purchases of common stock and stock option exercises.
Critical Accounting Polices and Estimates
The preparation of the consolidated financial statements and related disclosures in conformity withU.S. generally accepted accounting principles ("GAAP") and the Company's discussion and analysis of its financial condition and operating results require the Company's management to make judgments, assumptions and estimates that affect the amounts reported in its consolidated financial statements and accompanying notes. Catalyst's significant accounting policies and methods used in preparation of the Company's consolidated financial statements are described in Note 3, Summary of Significant Accounting Policies, of the Notes to the Consolidated Financial Statements 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 the Company's 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.
Stock-based Compensation
The Company measures 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 service 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 Catalyst has
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. The Company uses 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 Catalyst's assumptions
regarding a number of variables including the fair value of its 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. The Company records stock-based compensation as a
compensation expense, net of the forfeited awards. Catalyst elected to account
for forfeitures when they occur. As such, the Company recognizes stock-based
compensation expense over their requisite service period based on the vesting
provisions of the individual grants. See Note 10, Stock Based Compensation, to
the consolidated financial statements included in this Annual Report on Form
10-K for more information.
67
--------------------------------------------------------------------------------F351 Asset Acquisition
OnDecember 26, 2022 , the Company completed its acquisition of the F351 Assets in accordance with the terms of the F351 Agreement. Catalyst concluded that the acquisition did not result in the acquisition of a business, as substantially all of the fair value of the assets acquired was concentrated in a single identifiable asset, the intellectual property rights (outside of the PRC) to a clinical stage drug candidate for the treatment of liver fibrosis, or the F351 Assets. Significant judgment was required in evaluating the terms of the F351 Agreement and in valuing and recording the acquired assets at fair value as well as determining whether the acquired IPR&D had an alternative future use.
Redeemable Convertible Preferred Stock
In connection with the F351 Asset acquisition, Catalyst issued shares of a newly designated series of preferred stock, the Catalyst Convertible Preferred Stock, to GNI. Each share of Catalyst Convertible Preferred Stock is convertible into 10,000 shares of common stock, subject to stockholder approval under Nasdaq rules and subject to a beneficial ownership conversion blocker. The Company classified the Catalyst Convertible Preferred Stock as temporary equity on the consolidated balance sheet because if conversion to common stock is not approved by the stockholders, the Catalyst Convertible Preferred Stock would be redeemable at the option of the holders for cash equal to the closing price of the common stock on last trading day prior to the holder's redemption request. Catalyst recorded the Catalyst Convertible Preferred Stock at its relative fair value on the date of issuance (i.e., the closing date of the F351 Asset acquisition) and did not adjust the carrying value to its redemption value since the Catalyst Convertible Preferred Stock is not currently redeemable, and it is not probable that it will become redeemable in the future at the balance sheet date. Significant judgment was required in evaluating the various rights of the Catalyst Convertible Preferred Stock and in classifying and measuring the Catalyst Convertible Preferred Stock as well as determining whether the Catalyst Convertible Preferred Stock is a participating security upon issuance.
Contingent Value Rights Liability
OnDecember 26, 2022 , the Company executed the CVR Agreement, pursuant to which each CVR Holder received one contractual CVR for each share of Catalyst common stock held by such holder. Each CVR entitles the holder thereof to receive cash payments in the future. Certain contingent payments under the CVR Agreement qualified as derivatives under ASC 815, Derivatives and Hedging, and were recorded as a liability on the balance sheet as ofDecember 31, 2022 . The CVR liability is considered a Level 3 instrument that is initially measured at its estimated fair value on the transaction date and subsequently remeasured at each reporting date with changes recorded in the consolidated statement of operations. The determination of the initial and subsequent fair value of the CVR liability requires significant judgment by management. Changes in any of the inputs not related to facts and circumstances existing as of the transaction date may result in a significant fair value adjustment, which can impact the results of operations in the period in which the adjustment is made. 68
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