Celularity Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Financial amounts below are in millions of dollars unless stated otherwise. Celularity is a clinical-stage biotechnology company developing placental-derived cell therapies; it also operates biobanking and degenerative-disease product businesses. It reported three active clinical trials and no approved cellular therapeutics or therapeutic-product sales.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $3.8 | $3.2 | $9.7 | $5.9 |
| Gross profit / margin | $0.6 / 15.8% | $1.8 / 55.0% | $2.5 / 25.8% | $3.2 / 54.2% |
| Net income (loss) | $47.8 | $(64.5) | $(15.0) | $(146.0) |
| Operating cash flow | Not presented separately | Not presented separately | $(70.6) | $(43.3) |
- Q2 revenue increased 18.1%; six-month revenue increased 65.8%. The six-month increase was principally from license, royalty and other revenue, largely associated with sales to distribution partners.
- Q2 net income was driven by noncash fair-value gains: $45.0 million from contingent consideration and $43.2 million from warrant liabilities. It should not be read as evidence of positive underlying operating performance. Six-month operating loss was $37.4 million.
- Research and development expense was $25.3 million in Q2 and $47.0 million for six months, up 10.6% and 17.8%, respectively. Six-month SG&A was $32.0 million, down 12.2%, mainly due to lower stock-based compensation.
- Cash and cash equivalents were $38.0 million at June 30; restricted cash was an additional $14.8 million. Cash, cash equivalents and restricted cash totaled $52.8 million. Six-month capital expenditures were $2.9 million.
- Six-month financing provided $74.2 million, including $46.5 million from warrant exercises and approximately $27.4 million net from a May PIPE. Financing obligations were zero at quarter-end; operating lease liabilities were $27.9 million. Acquisition-related contingent consideration was $192.0 million.
- Current assets were $75.5 million and current liabilities $32.9 million. Inventory rose to $27.0 million from $12.3 million at year-end 2021.
Material changes versus prior comparable periods
- Despite higher revenue, gross margin fell substantially: distribution-related license revenue carried higher costs, and the company cited product mix and increased material and labor costs.
- Six-month operating cash use increased to $70.6 million from $43.3 million. The filing attributes the increase primarily to operating cash-flow movements; cash outflow included a $14.7 million increase in inventory.
- The company recorded large favorable fair-value changes in 2022, versus unfavorable changes in 2021, materially affecting reported earnings. These valuation changes are noncash and depend on assumptions and market inputs.
- Celularity adopted lease accounting in 2022, recognizing operating right-of-use assets and lease liabilities; comparative periods were not restated.
- The share count increased during the period through warrant exercises and the PIPE. The May PIPE issued 4.1 million shares and warrants; 13.3 million shares were issued upon warrant exercises.
Outlook, risks and unusual items
- Liquidity and going concern: Management said June 30 cash and cash equivalents were expected to fund operations only into the fourth quarter of 2022. The company concluded substantial doubt existed about its ability to continue as a going concern and stated it needs substantial additional financing. Financing is not assured; absent funding, it may postpone or reduce development activities. It expects continuing losses and increased development and operating costs.
- Clinical and regulatory: In late May, the FDA requested additional information on the CYCART-19 IND before the planned Phase 1/2 trial could proceed. The company said it would work to resolve the questions; timing is uncertain. It also cited clinical, manufacturing, regulatory-approval and third-party-dependency risks.
- Commercial and concentration risks: One customer represented about 60% of accounts receivable at June 30. CMS had rejected claims for Interfyl submitted by that customer; the balance remained outstanding and no reserve was recorded. Three customers accounted for about 53% of six-month revenue.
- Controls: Management concluded disclosure controls were not effective because of material weaknesses involving the control environment and accounting for contingent consideration, deferred taxes and warrants. Remediation was underway.
- Other developments: President Andrew Pecora notified the board in July that he would resign effective August 31, 2022; a consulting arrangement was expected. The company’s Palantir agreement provides for $40 million over five years; $4.0 million was recorded in six-month R&D expense.
- COVID-19, dependence on placental tissue supply and third parties, clinical-trial outcomes, intellectual property, competition and the need for additional capital remain among the stated risks. No material litigation outcome was identified in the filing.
Investor facts to verify
- Cash runway assumptions, financing plans and any subsequent funding or cost-reduction actions.
- Resolution and timing of FDA questions on the CYCART-19 IND, and progress in the three active trials.
- Recoverability and collection status of the concentrated customer receivable and CMS-rejected Interfyl claims.
- Inventory composition, valuation and expected sale or use, given the increase during the half-year.
- Underlying operating results excluding noncash fair-value gains, and the assumptions behind contingent-consideration and warrant valuations.
- Progress in remediating material weaknesses and any effect of the President’s departure on operations and unvested awards.