Celularity Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Celularity is a clinical-stage biotechnology company developing placenta-derived cell therapies, with commercial biomaterials and biobanking businesses. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $2.94m | $3.78m | $6.87m | $9.71m |
| Gross profit / approximate gross margin | $2.14m / 72.7% | $0.60m / 15.8% | $4.07m / 59.2% | $2.51m / 25.8% |
| Operating loss | $(42.48)m | Operating income $4.18m | $(106.35)m | $(37.44)m |
| Net loss (income) | $(47.95)m | $47.83m income | $(111.97)m | $(15.04)m |
| Operating cash flow | Not separately presented | Not separately presented | $(26.02)m | $(70.57)m |
- Q2 revenue fell 22% year over year; first-half revenue fell 29%. Management attributed the decline mainly to reduced license, royalty and other revenue after losing business with former distributor Evolution, and lower product sales.
- Q2 R&D expense was $8.6m, down 66%; SG&A was $12.8m, down 18%. The reductions primarily reflect the workforce reduction and lower clinical-trial activity.
- Q2 results included a $107.8m IPR&D impairment and an $85.4m gain from the decrease in fair value of acquisition-related contingent consideration. For the six months, Celularity also recorded a $29.6m goodwill impairment and a $23.9m Palantir software cease-use charge.
- At June 30, cash and cash equivalents were $3.1m; restricted cash was $14.8m. Current assets were $18.0m versus current liabilities of $65.0m. Accumulated deficit was $757.5m.
- Debt included Yorkville short-term debt with $17.0m unpaid principal ($16.8m fair value) and about $17.0m of long-term secured borrowings. Operating lease liabilities were $28.1m.
- First-half financing cash flow was $18.4m, including equity and secured-loan proceeds, offset in part by $16.8m of Yorkville principal repayments. Cash, cash equivalents and restricted cash declined $10.9m during the period.
Material changes, outlook and risks
- Celularity reprioritized operations and reduced its workforce by approximately one-third by March 2023. It stopped recruiting in the GBM and HER2+ gastric trials; the AML trial was closed to enrollment and follow-up completed. The company said it was no longer investigating CYNK-001 and halted NK programs. No cellular therapy candidate is approved or generating sales.
- Management said R&D and SG&A spending should decrease in the near term, but provided no quantified financial guidance. It is pursuing additional capital and strategic, licensing, collaboration and distribution opportunities. Middle East biomaterials sales depend on local approvals, which had not been obtained by the filing date.
- Going concern: Management concluded substantial doubt exists about the company’s ability to continue as a going concern. At the filing’s issuance date, unrestricted cash was approximately $1.7m, and management reported no additional capital source secured or deemed probable to fund operations for the next 12 months.
- Debt and covenant pressure: Yorkville notified the company of an August 1 trigger event; $6.34m, including interest, was past due as of the issuance date. Yorkville could accelerate repayment of the outstanding balance if the company fails to pay or obtain a waiver. Cash below $3.0m for more than five consecutive business days also triggered an event of default under the C.V. Starr and RWI loan agreements; lenders could declare amounts due if the breaches are not cured or waived.
- Nasdaq had notified Celularity that it did not meet the $1 minimum bid-price requirement, with a compliance deadline of September 11, 2023. Failure to regain compliance could adversely affect trading liquidity and access to capital.
- Other notable matters include Palantir arbitration over a $40m, five-year software agreement (Palantir seeks damages equal to the contract value; Celularity asserts counterclaims); a federal Civil Investigative Demand concerning claims involving tissue products, including Interfyl; and Celularity’s lawsuit seeking approximately $2.35m plus interest from Evolution for unpaid invoices. CMS claim rejections for Interfyl through a distribution partner were also reported as unresolved.
- After quarter-end, Celularity raised approximately $3.0m in a July registered direct offering, issuing 8.57m shares and warrants. The filing also reports material weaknesses in internal control over financial reporting and ineffective disclosure controls as of June 30.
Investor verification priorities
- Confirm immediate cash availability, Yorkville’s past-due repayment and any waiver, and whether the secured lenders’ covenant defaults were cured or waived.
- Assess the likelihood, timing and terms of additional financing, and resulting dilution; 190.9m Class A shares were outstanding on August 10, 2023, in addition to substantial warrants and equity awards.
- Reconcile the impairment disclosures: the financial statements report no Q2 goodwill impairment and place the $29.6m goodwill charge in the first half, while portions of MD&A describe a $29.6m Q2 goodwill charge. The $107.8m Q2 IPR&D impairment is reported in the financial statements.
- Track Nasdaq bid-price compliance and the status and potential financial consequences of the Palantir arbitration, federal investigative demand and Evolution collection litigation.
- Verify progress on remaining development programs, regulatory approvals for overseas biomaterials sales, and any evidence that the commercial businesses can support ongoing cash needs.