Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion of our financial condition and results of operations together with the unaudited interim condensed consolidated financial statements and the notes thereto included elsewhere in this report and other financial information included in this report. The following discussion may contain predictions, estimates and other forward-looking statements. See “Special Note Regarding Forward-Looking Statements.” These forward-looking statements involve a number of risks and uncertainties, including those discussed in this report and under “Part I — Item 1A. Risk Factors” in the 2022 Form 10-K. These risks could cause our actual results to differ materially from any future performance suggested below.
Overview
We are a biotechnology company leading the next evolution in cellular medicine by developing off-the-shelf placental-derived allogeneic cell therapies for the treatment of cancer and immune and infectious diseases. We are developing a pipeline of off-the-shelf placental-derived allogeneic cell therapy product candidates including T cells engineered with a chimeric antigen receptor, or CAR, natural killer, or NK, cells, mesenchymal-like adherent stromal cells, or MLASCs and exosomes. These therapeutic candidates target indications across cancer, infectious and degenerative diseases. We believe that by harnessing the placenta’s unique biology and ready availability, we will be able to develop therapeutic solutions that address a significant unmet global need for effective, accessible and affordable therapeutics. We also actively develop and market biomaterial products derived from the placenta. Prior to 2023, we marketed those products domestically primarily serving the orthopedic and wound care markets. We now intend to market placental biomaterials outside of the United States with an initial focus on markets in the Middle East and North Africa. Our biomaterials business today is comprised primarily of the sale of our Biovance and Interfyl products, directly or through our distribution network. Biovance is decellularized, dehydrated human amniotic membrane derived from the placenta of a healthy, full-term pregnancy. It is an intact, natural extracellular matrix that provides a foundation for the wound regeneration process and acts as a scaffold for restoration of functional tissue. Interfyl is human connective tissue matrix derived from the placenta of a healthy, full-term pregnancy. It is used by a variety of medical specialists to fill soft tissue deficits resulting from wounds, trauma, or surgery. We are developing new placental biomaterial products to deepen the commercial pipeline beyond Biovance and Interfyl. We also plan to leverage our core expertise in cellular therapeutic development and manufacturing to generate revenues by providing contract manufacturing and development services to third parties. The initial focus of this new service offering will be to assist development stage cell therapy companies with the development and manufacturing of their therapeutic candidates for clinical trials. In January 2023, we announced reprioritization of efforts, which resulted in a reduction of approximately one-third of our workforce as of March 2023.
Our Celularity IMPACT platform capitalizes on the benefits of placenta-derived cells to target multiple diseases, and provides seamless integration, from bio sourcing through manufacturing cryopreserved and packaged allogeneic cells, in our purpose-built U.S.-based 147,215 square foot facility. We believe the use of placental-derived cells, sourced from the placentas of full-term healthy informed consent donors, has potential inherent advantages, from a scientific and an economic perspective. First, relative to adult-derived cells, placental-derived cells demonstrate greater stemness, meaning the ability to expand and persist. Second, placental-derived cells are immunologically naïve, meaning the cells have never been exposed to a specific antigen, and suggesting the potential for less toxicity and for low or no graft-versus-host disease, or GvHD, in transplant. Third, our placental-derived cells are allogeneic, meaning they are intended for use in any patient, as compared to autologous cells, which are derived from an individual patient for that patient’s sole use. We believe this is a key difference that will enable readily available off-the-shelf treatments that can be delivered faster, more reliably, at greater scale and to more patients.
From a single source material, the postpartum human placenta, we derive five allogeneic cell or extracellular vesicle types: T cells, unmodified NK cells, genetically modified NK cells, MLASCs and exosomes, which are used in seven key cell therapeutic programs—CYCART-19, CYCART-201, CYNK-001, CYNK-301, CYNK-302, APPL-001, and pEXO-001. CYCART-19 is a placental-derived CAR-T cell therapy, in development for the treatment of B-cell malignancies, initially targeting the cluster of differentiation 19, or CD19, receptor, the construct and related CARs for which are in-licensed from Sorrento. In the first quarter of 2022, we submitted an IND to investigate CYCART-19 for treatment of B-cell malignancies and in late May 2022, received formal written communication from FDA requesting additional information before we can proceed with the planned Phase 1/2 clinical trial. We are in the process of working with the FDA in an effort to resolve its questions as promptly as possible. We expect to commence the trial, if the IND is cleared by FDA, and sufficient funding is available, in second half of 2023. We also expect to progress CYCART-201, our genetically modified T-cell expressing CD16 with a T-cell receptor, or TCR, knockout in combination with monoclonal antibodies, or mAbs, in non-Hodgkin's lymphoma, or NHL, and in solid tumors. CYNK-001 is a placental-derived unmodified NK cell. In 2022, we had active and approved clinical trials under development for the treatment of acute myeloid leukemia, or AML, a blood cancer, and for glioblastoma multiforme, or GBM, a solid tumor cancer. We will also advance CYNK-301 as our next generation CAR-NK that has the potential to overcome some of the challenges faced by NK therapies in treating relapse refractory AML, or rrAML. Due to a need to prioritize corporate resources, in January 2023 we announced our intention to cease recruitment in the GBM and the HER2+ gastric trials. In addition, in April 2023, we announced based on the preliminary results of the phase 1 trial data of CYNK-001, the AML trial will be closed to further enrollment. We will however, continue to advance our solid tumor research programs. CYNK-302 is a next generation CAR-NK being developed in solid tumors with an initial focus on non-small cell lung cancer, or NSCLC, an area of continued
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high unmet need. APPL-001 is a placenta-derived MLASC being developed for the treatment of Crohn’s disease, and other degenerative diseases. pExo-001 is placenta-derived exosome being developed for the treatment of osteoarthritis.
Our Celularity IMPACT manufacturing process is a seamless, fully integrated process designed to optimize speed and scalability from the sourcing of placentas from full-term healthy informed consent donors through the use of proprietary processing methods, cell selection, product-specific chemistry, manufacturing and controls, or CMC, advanced cell manufacturing and cryopreservation. The result is a suite of allogeneic inventory-ready, on demand placental-derived cell therapy products. We also operate and manage a commercial biobanking business that includes the collection, processing and cryogenic storage of certain birth byproducts for third-parties.
Our current science is the product of the cumulative background and effort over two decades of our seasoned and experienced management team. We have our roots in Anthrogenesis Corporation, or Anthrogenesis, a company founded under the name Lifebank in 1998 by Robert J. Hariri, M.D., Ph.D., our founder and Chief Executive Officer, and acquired in 2002 by Celgene Corporation, or Celgene. The team continued to hone their expertise in the field of placental-derived technology at Celgene through August 2017, when we acquired Anthrogenesis. We have a robust global intellectual property portfolio comprised of over 1,500 patents and patent applications protecting our Celularity IMPACT platform, our processes, technologies and current key cell therapy programs. We believe this know-how, expertise and intellectual property will drive the rapid development and, if approved, commercialization of these potentially lifesaving therapies for patients with unmet medical needs.
Recent Developments
Private Placement - March 2023
In March 2023, we closed a private placement of (i) 9,381,841 shares of our Class A common stock, and (ii) accompanying warrants to purchase up to 9,381,841 shares of our Class A common stock, or the March 2023 PIPE Warrants, for $0.8343 per share and $0.125 per accompanying March 2023 PIPE Warrant, for an aggregate purchase price of approximately $9.0 million (of which Dr. Hariri subscribed for $2.0 million) pursuant to that certain securities purchase agreement dated March 20, 2023 with two accredited investors, including our Chairman and Chief Executive Officer, Dr. Robert Hariri. Each March 2023 PIPE Warrant has an exercise price of $3.00 per share, is immediately exercisable, will expire on March 27, 2028 (five years from the date of issuance), and is subject to customary adjustments for certain transactions affecting our capitalization.
We also entered into a registration rights agreement with the purchasers whereby we agreed to register the resale of the shares of our Class A common stock and the shares of our Class A common stock issuable upon exercise of the March 2023 PIPE Warrants as well as the shares issued as payment pursuant to the binding term sheet for a sublicense (described below). We were required to prepare and file a registration statement with the Securities and Exchange Commission, or SEC, within 30 days of the filing of our annual report on Form 10-K for the year ended December 31, 2022, and to use commercially reasonable efforts to have the registration statement declared effective within 45 days if there is no review by the SEC, and within 90 days in the event of such review, and in any event, no later than June 30, 2023.
Senior Secured Bridge Loans
In March 2023, we entered into a Loan Agreement with C.V. Starr & Co. Inc., one of our stockholders, or C.V. Starr, providing for a loan in the aggregate principal amount of $5.0 million net of an original issue discount of $100,000, which bears interest at a rate of 12.0% per year, with the first year of interest being paid in kind on the last day of each month, and matures March 17, 2025, or the Starr Bridge Loan, and warrants to acquire up to an aggregate 750,000 shares of our Class A common stock, or the Starr Warrant, at a purchase price of $0.125 per whole share underlying the Starr Warrant (or $93,750). The Starr Warrant has a 5-year term and an exercise price of $0.71 per share.
Pursuant to the terms of the Starr Bridge Loan, we agreed to customary negative covenants restricting our ability to repay indebtedness, pay dividends to stockholders, repay or incur other indebtedness other than as permitted, grant or suffer to exist a security interest in any our assets, other than as permitted, or hold cash and cash equivalents less than $3.0 million for more than five consecutive business days. In addition to the negative covenants in the Starr Bridge Loan, the Starr Bridge Loan include customary events of default. Pursuant to the terms of the Starr Bridge Loan, we granted Starr a senior security interest in all of our assets.
In May 2023, we entered into a senior secured loan agreement with Resorts World Inc Pte Ltd, or RWI, providing for a loan in the aggregate principal amount of $6.0 million net of an original issue discount of $120,000, which bears interest at a rate of 12.5% per year, with the first year of interest being paid in kind on the last day of each month, and matures June 14, 2023, or the RWI Bridge Loan. Pursuant to the terms of the RWI Bridge Loan, we are required to apply the net proceeds from the RWI Bridge Loan to the payment due to Yorkville pursuant to that certain pre-paid advance agreement dated September 15, 2022, as amended, or the PPA. Any other use of proceeds requires prior written approval by RWI. RWI is affiliated with Lim Kok Thay, a member of our board of directors.
Pursuant to the terms of the RWI Bridge Loan, we agreed to customary negative covenants restricting our ability to repay indebtedness, pay dividends to stockholders, repay or incur other indebtedness other than as permitted, grant or suffer to exist a security interest in any of our assets, other than as permitted, or hold cash and cash equivalents less than $3.0 million for more than five
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consecutive business days. In addition to the negative covenants in the RWI Bridge Loan, the RWI Bridge Loan includes customary events of default. Pursuant to the terms of the RWI Bridge Loan, we granted RWI a senior security interest in all of our assets, pari passu with C.V. Starr pursuant to the Starr Bridge Loan.
Binding Term Sheet for Sublicense Agreement
Concurrent with the entry into the securities purchase agreement for the March 2023 private placement described above; we executed a binding term sheet to negotiate and enter into a sublicense of certain assets from an affiliate of the accredited investor party to the private placement transaction. Pursuant to the binding term sheet, we paid the sublicensor $3.0 million in cash and issued $1.0 million of shares of our Class A common stock (1,694,915 shares based on the closing price on March 17, 2023) as consideration for stem-cells inventory to be used in research and development.
Registered Direct Offering
In April 2023, we closed on a registered direct offering of 9,230,770 shares of our Class A common stock together with warrants to purchase up to 9,230,770 shares of our Class A common stock at a combined purchase price of $0.65 per share and accompanying warrant, resulting in total gross proceeds of approximately $6.0 million before deducting placement agent commissions and other estimated offering expenses. The warrants have an exercise price of $0.75, will be exercisable beginning six months after the date of issuance and will expire five years thereafter. We also amended existing warrants to purchase up to an aggregate of 4,054,055 shares at an exercise price of $8.25 per share, with an expiration date of May 20, 2027, held by the same investor, effective upon the closing of the offering to reduce the exercise price to $0.75 per share and extended expiration date to five and one-half years following the closing of the offering. We used the $5.5 million net proceeds from the offering to repay our obligations to Yorkville under that certain pre-paid advance agreement dated September 15, 2022, as amended, or the PPA.
Private Placement – May 2023
In May 2023, we entered into a securities purchase agreement with a group of accredited investors, providing for the private placement of an aggregate (i) 5,813,945 shares of our Class A common stock and (ii) accompanying warrants to purchase up to 5,813,945 shares of Class A common stock, or the May 2023 PIPE Warrants, for $0.52 per share and $0.125 per accompanying May 2023 PIPE Warrant, for an aggregate purchase price of approximately $3.7 million, which private placement closed on May 18, 2023 upon satisfaction of customary closing conditions.
Each May 2023 PIPE Warrant has an exercise price of $1.00 per share, is immediately exercisable, will expire on May 18, 2028 (five years from the date of issuance), and is subject to customary adjustments for certain transactions affecting our capitalization. The May 2023 PIPE Warrants may not be exercised if the aggregate number of shares of Class A common stock beneficially owned by the holder thereof (together with its affiliates) would exceed the specified percentage cap provided therein (which may be adjusted upon 61 days advance notice) immediately after exercise thereof.
We also entered into a registration rights agreement with the purchasers whereby we agreed to register the resale of the shares of Class A common stock and the shares of Class A common stock issuable upon exercise of the May 2023 PIPE Warrants. We will be required to prepare and file a registration statement with the SEC within 30 days, and to use commercially reasonable efforts to have the registration statement declared effective within 45 days if there is no review by the SEC, and within 90 days in the event of such review, and in any event, no later than July 31, 2023.
Cell Therapy – Goodwill Impairment
During the three months ended March 31, 2023, we experienced a sustained decline in our stock price resulting in our market capitalization being less than the carrying value of our combined reporting units. We concluded the sustained decline in its stock price and decision to discontinue certain Cell Therapy clinical trials were triggering events during the quarter and we performed a quantitative impairment test on goodwill and acquired in-process research and development (IPR&D) assets. Based on the results of the impairment analysis, we recognized a $29.6 million goodwill impairment charge for the three months ended March 31, 2023, relating to our Cell Therapy reporting unit in our condensed consolidated statements of operations.
Palantir – Cease-Use Costs
In May 2021, our subsidiary, Legacy Celularity executed a Master Subscription Agreement with Palantir Technologies, Inc., or Palantir, under which it agreed to pay $40.0 million over five years for access to Palantir’s Foundry platform along with certain professional services. In January 2023, we ceased use of the software and provided a notice of dispute to Palantir on the basis that the software has not performed as promised and that Palantir has failed to provide us with the professional services necessary to successfully implement, integrate and enable the Foundry platform. As a result, in accordance with ASC 420 Exit or Disposal Costs, during the three months ended March 31, 2023, we recognized the remaining related cease-use costs and liability estimated based on the discounted future cash flows of contract payments for $23.7 million which is included as a component of research and development expense in the condensed consolidated statements of operations. We have both a current and noncurrent liability for accrued research and development software on the condensed consolidated balance sheets for a total liability of $31.0 million and $7.3 million as of March 31, 2023 and December 31, 2022, respectively. For the three months ended March 31, 2022, we had recorded $2.0 million, which was on a
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straight-line basis, which was included as a component of research and development expense in our condensed consolidated statements of operations. Palantir has filed to compel arbitration of this dispute. See also Item 1 of Part II of this quarterly report on Form 10-Q.
Going Concern
In accordance with Accounting Standards Update ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40), or ASU 205-40, we evaluated whether there are certain conditions and events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date that the consolidated financial statements are issued.
As an emerging clinical-stage biotechnology company, we are subject to certain inherent risks and uncertainties associated with the development of an enterprise. In this regard, since our inception, substantially all of management’s efforts have been devoted to making investments in research and development including basic scientific research into placentally-derived allogeneic cells, pre-clinical studies to support our current and future clinical programs in cellular therapeutics, and clinical development of our cell programs as well as facilities and selling, general and administrative expenses that support our core business operations (collectively the “investments”), all at the expense of our short-term profitability. We have historically funded these investments through limited revenues generated from our biobanking and degenerative disease businesses and issuances of equity and debt securities to public and private investors (these issuances are collectively referred to as “outside capital”). Notwithstanding these efforts, management can provide no assurance that our research and development and commercialization efforts will be successfully completed, or that adequate protection of our intellectual property will be adequately maintained. Even if these efforts are successful, it is uncertain when, if ever, we will generate significant sales or operate in a profitable manner to sustain our operations without needing to continue to rely on outside capital. Continued decline in our share price could result in impairment of goodwill or long-lived assets in a future period.
As of the date the accompanying consolidated financial statements were issued, or the issuance date, management evaluated the significance of the following adverse conditions and events in accordance with ASU 205-40:
•Since inception, we have incurred significant operating losses and cash used in operating activities. For the three months ended March 31, 2023, we incurred a net operating loss of $63.9 million and cash used in operating activities of $15.0 million. As of March 31, 2023, we had an accumulated deficit of $709.5 million. We expect to continue to incur significant operating losses and use net cash in operations for the foreseeable future.
•As of the issuance date, we had approximately $5.7 million of unrestricted cash and cash equivalents available to fund our operations and no available additional sources of outside capital to sustain our operations for a period of 12 months beyond the issuance date.
•We expect to incur substantial expenditures to fund our investments for the foreseeable future. In order to fund these investments, we will need to secure additional sources of outside capital. While we are actively seeking to secure additional outside capital (and have historically been able to successfully secure such capital), as of the issuance date, no additional outside capital has been secured or was deemed probable of being secured. In addition, management can provide no assurance that we will be able to secure additional outside capital in the future or on terms that are acceptable to us. Absent an ability to secure additional outside capital in the very near term, we will be unable to meet our obligations as they become due over the next 12 months beyond the issuance date.
•In connection with clinical data received in April 2023, we expect to incur a full impairment charge on our CYNK-001 IPR&D asset for $89.1 million and will be evaluating the potential impact on any further goodwill impairment on our Cell Therapy reporting unit as well as analyzing the potential impact for any impairment for any other long-lived assets for the quarter ended June 30, 2023.
•We had approximately $32.4 million of borrowings outstanding under a financing arrangement referred to as the PPA with a private investor, Yorkville, as of March 31, 2023. These borrowings are scheduled to mature in September 2023 absent Yorkville’s election to convert some or all of the borrowings into shares of our Class A common stock. On February 22, 2023, Yorkville provided notice to us that a “triggering event” had occurred, we are now required to make repayments of $6.0 million per month plus a payment premium of 5% of the principal amount being paid and all outstanding accrued and unpaid interest (collectively the “repayment amount”). On March 24, 2023, we paid approximately $2.0 million of the repayment amount owed to Yorkville. On April 10, 2023, we paid approximately $5.5 million from the net proceeds from the registered direct to repay Yorkville the remaining balance on the first trigger payment and partial payment towards the second for $900,000. In April 2023, we and Yorkville agreed to defer the remaining second repayment amount owed of approximately $5.6 million to May 14, 2023. On May 16, 2023, we repaid the $5.6 million remaining balance due on the second trigger payment from the net proceeds from the RWI Bridge Loan. We owe Yorkville a third trigger payment of approximately $6.6 million as of the issuance date. If we fail to secure a waiver from Yorkville and fails to pay the remaining repayment amount currently due, Yorkville could deem such non-payment an event of default under the PPA. If Yorkville deems such non-payment an event of default, Yorkville may, at its discretion, exercise its rights and remedies as provided in the PPA which may include, among others, accelerating the repayment of the total principal due under the PPA
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(approximately $32.4 million as of March 31, 2023 or approximately $21.8 million as of issuance date), plus accrued and unpaid interest and the 5% premium, and/or force us to seek protection under the provisions of the U.S. Bankruptcy Code. We are also seeking stockholder approval to lower the floor price at which shares may be sold to Yorkville pursuant to the PPA to $0.50.
•On March 14, 2023, we received a notice from the Nasdaq notifying us that we no longer comply with the minimum bid price requirement for continued listing on the Nasdaq Capital Market because the closing bid price for our Class A common stock has fallen below $1.00 per share for the last 30 consecutive business days. We have a period of 180 calendar days, or until September 11, 2023, to regain compliance with the minimum bid price requirement. We intend to actively monitor the closing bid price of our Class A common stock and will evaluate available options to regain compliance with the minimum bid requirement. However, management can provide no assurance that we will be able to regain compliance with the minimum bid requirement during the 180-day compliance period, secure a second period of 180 days to regain compliance, or maintain compliance with the other Nasdaq listing requirements. In the event we are unable to regain or maintain compliance with the Nasdaq listing requirements, the liquidity of our publicly traded securities will be adversely affected and our ability to secure additional outside capital through public markets will be adversely affected.
•In the event we are unable to secure additional outside capital to fund our obligations when they become due over the next 12 months beyond the issuance date, which includes the funds needed to repay the outstanding principal on the PPA (plus unpaid accrued interest and the 5% premium) that has become due and will become fully due in September 2023, and/or obtain a waiver to defer the remaining repayment amount currently due to Yorkville, and/or regain compliance with the Nasdaq listing requirements, management will be required to seek other strategic alternatives, which may include, among others, a significant curtailment of our operations, a sale of certain of our assets, a sale of our entire company to strategic or financial investors, and/or allowing us to become insolvent by filing for bankruptcy protection under the provisions of the U.S. Bankruptcy Code.
These uncertainties raise substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements have been prepared on the basis that we will continue to operate as a going concern, which contemplates that we will be able to realize assets and settle liabilities and commitments in the normal course of business for the foreseeable future. Accordingly, the accompanying consolidated financial statements do not include any adjustments that may result from the outcome of these uncertainties.
COVID-19 Pandemic and Other Uncertainties
While the impact of COVID-19 has largely subsided, the residual effect of COVID-19 and its variants, as well as new risks emerging from geopolitical conflict, inflation, bank failures and the threat of a recession continue to cause economic instability and could affect our ability to operate our business. During 2022 and the first quarter of 2023, we did not experience any significant impact to operations as a result of such uncertainties.
Business Segments
We manage our operations through an evaluation of three distinct business segments: Cell Therapy, Degenerative Disease, and BioBanking. The reportable segments were determined based on the distinct nature of the activities performed by each segment. Cell Therapy broadly refers to cellular therapies we are researching and developing, which are unproven and in various phases of development. All of the cell therapy programs fall into the Cell Therapy segment. We have no approved cell therapy product and have not generated revenue from the sale of cellular therapies to date. Degenerative Disease produces, sells and licenses products used in surgical and wound care markets, such as Biovance, Biovance 3L, Interfyl and CentaFlex. We sell products in this segment both using our own sales force as well as independent distributors. We are developing additional tissue-based products for the Degenerative Disease segment. BioBanking collects stem cells from umbilical cords and placentas and provides storage of such cells on behalf of individuals for future use. We operate in the biobanking business primarily under the LifebankUSA brand. For more information about our reportable business segments refer to Note 14, “Segment Information” of our unaudited interim condensed consolidated financial statements included elsewhere in this quarterly report on Form 10-Q.
Acquisitions and Divestitures
Our current operations reflect strategic acquisitions and divestitures that we have made since formation. Additional details regarding the following acquisitions can be found in Note 1, “Nature of Business” to our unaudited interim condensed consolidated financial statements included elsewhere in this quarterly report on Form 10-Q.
In May 2017, we acquired HLI Cellular Therapeutics, LLC, or HLI CT, from Human Longevity Inc. HLI CT operated LifebankUSA, a private umbilical cord blood stem cell and cord tissue bank that offers parents the option to collect, process and cryogenically preserve newborn umbilical cord blood stem cells and cord tissue units. The HLI CT acquisition also provided us with rights to a portfolio of biomaterial assets, including Biovance and Interfyl. At the time of the HLI CT acquisition, Biovance and Interfyl
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were subject to an exclusive distribution arrangement with Alliqua Biomedical, Inc., or Alliqua. In May 2018, we acquired certain assets from Alliqua, including Alliqua’s biologic wound care business, which included the marketing and distribution rights to Biovance and Interfyl.
In August 2017, we acquired Anthrogenesis, a wholly-owned subsidiary of Celgene. The Anthrogenesis acquisition included a portfolio of pre-clinical and clinical stage assets, including key cellular therapeutic assets that we continue to develop. The Anthrogenesis acquisition gives us access to Anthrogenesis’ proprietary technologies and processes for the recovery of large quantities of high-potential stem cells and cellular therapeutic products derived from postpartum human placentas, each an Anthrogenesis Product. As part of the Anthrogenesis acquisition, some of the inventors of the Anthrogenesis Products and other key members of the Anthrogenesis Product development team joined us.
In October 2018, we acquired CariCord Inc., or CariCord, a family cord blood bank established by ClinImmune Labs University of Colorado Cord Blood Bank and the Regents of the University of Colorado, a body corporate, for and on behalf of the University of Colorado School of Medicine.
Licensing Agreements
In the ordinary course of business, we license intellectual property and other rights from third parties and have also out-licensed our intellectual property and other rights, including in connection with our acquisitions and divestitures, described above. Additional details regarding our licensing agreements can be found in Note 13, “License and Distribution Agreements” to our unaudited interim condensed consolidated financial statements included elsewhere in this quarterly report on Form 10-Q.
In September 2020, we entered into a license and transfer agreement, or the Sorrento Agreement, with Sorrento. Henry Ji, Ph.D., a former member of the board of directors of our wholly-owned subsidiary, which we refer to as Legacy Celularity, currently serves as President and Chief Executive Officer of Sorrento. Sorrento is also a significant stockholder of our company and invested in the July 2021 private investment in public equity financing concurrent with the closing of the business combination among our company and Legacy Celularity. Pursuant to the Sorrento Agreement, we obtained a worldwide license for the CD19 CAR construct that forms the basis of the genetic modification for CYCART-19. We are currently in the process of negotiating a supply agreement with Sorrento for the manufacturing and supply of the CD19 CAR construct licensed from Sorrento.
In August 2017, in connection with the Anthrogenesis acquisition, we entered into a license agreement, or the Celgene License, with Celgene, which has since been acquired by Bristol Meyers Squibb. Pursuant to the Celgene License, we granted Celgene a worldwide, royalty-free, fully-paid up, non-exclusive license, without the right to grant sublicenses (other than to its affiliates), under Anthrogenesis’ intellectual property in existence as of the date of the Celgene License or as developed by Celgene in connection with any transition services activities related to the merger for non-commercial pre-clinical research purposes, as well as to develop, manufacture, commercialize and fully exploit products and services that relate to the construction of any CAR, the modification of any T-cell or NK cell to express such a CAR, and/or the use of such CARs or T-cells or NK cells for any purpose, which commercial license is sublicensable. Either party may terminate the Celgene License upon an uncured material breach of the agreement by the other party or insolvency of the other party.
In August 2017, Legacy Celularity also issued shares of its Series X Preferred Stock to Celgene as merger consideration and entered into a contingent value rights agreement, or the CVR Agreement, with Celgene pursuant to which Legacy Celularity issued one contingent value right or CVR, in respect of each share of Legacy Celularity Series X Preferred Stock issued to Celgene in connection with the Anthrogenesis acquisition. The CVR Agreement entitles the holders of the CVRs to an aggregate amount, on a per program basis, of $50 million in regulatory milestones and an aggregate $125 million in commercial milestone payments with respect to certain of our investigational therapeutic programs. In addition, with respect to each such program and calendar year, the CVR holders will be entitled to receive a royalty equal to a mid-teen percentage of the annual net sales for such program’s therapeutics from the date of the first commercial sale of such program’s therapeutic in a particular country until the latest to occur of the expiration of the last to expire of any valid patent claim covering such program therapeutic in such country, the expiration of marketing exclusivity with respect to such therapeutic in such country, and August 2027 (i.e., the tenth anniversary of the closing of the acquisition of Anthrogenesis). No payments under the CVR Agreement have been made to date. We estimate the liability associated with the CVR quarterly. Changes to that liability include but are not limited to changes in our clinical programs, assumptions about the commercial value of those programs and the time value of money.
Components of Operating Results
Net revenues
Net revenues include: (i) sales of biomaterial products, including Biovance, Biovance 3L, Interfyl, and CentaFlex of which our direct sales are included in Product Sales and Rentals while sales through our network of distribution partners are included in License,
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royalty and other; and (ii) the collection, processing and storage of umbilical cord and placental blood and tissue after full-term pregnancies, collectively, Services.
Cost of revenues
Cost of revenues consists of labor, material and overhead costs associated with our two existing commercial business segments, biobanking and degenerative disease. Biobanking costs include the cost of storage and transportation kits for newly banked materials as well as tank and facility overhead costs for cord blood and other units in storage. Degenerative disease costs include costs associated with procuring placentas, qualifying the placental material and processing the placental tissue into a marketable product. Costs in the degenerative disease segment include labor and overhead costs associated with the production of the Biovance, Biovance 3L, Interfyl and CentaFlex product lines. Cost of revenues associated with direct sales are part of Product Sales and Rentals while cost of revenues associated with sales through our network of distribution partners are included in License, royalty and other.
Research and development expense
Our research and development expenses primarily relate to basic scientific research into placentally derived allogeneic cells, pre-clinical studies to support our current and future clinical programs in cellular medicine, clinical development of our NK cell programs and facilities, depreciation and other direct and allocated expenses incurred as a result of research and development activities. We incur expenses for third party CROs, that assist in running clinical trials, clinical trial supply costs, personnel expenses for research scientists, specialized chemicals and reagents used to conduct biologic research, expense for third party testing and validation and various overhead expenses including rent and facility maintenance expense. Basic research, research collaborations involving partners and research designed to enable successful regulatory submissions is critical to our current and future success in cell therapy. As a result of our reprioritization efforts, we anticipate that our research and development expenditures will decrease in the near term. The amount of our research and development expenditures will depend on numerous factors, including the timing of clinical trials, preliminary evidence of efficacy in clinical trials and the number of indications that we choose to pursue.
General and administrative expense
Selling, general and administrative expense consists primarily of personnel costs including salaries, bonuses, stock compensation and benefits for specialized staff that support our core business operations. Executive management, finance, legal, human resources and information technology are key components of selling, general and administrative expense and those expenses are recognized when incurred. We expect that as a result of our reprioritization efforts, we will see a decrease in our selling, general and administrative costs in the near term. The magnitude and timing of our selling, general and administrative costs will depend on the progress of clinical trials, commercialization efforts for any approved therapies including the release of new products within the degenerative disease portfolio, changes in the regulatory environment or staffing needs to support our business strategy.
Change in fair value of contingent consideration liability
Because the acquisitions of Anthrogenesis from Celgene and HLI CT were accounted for as business combinations, we recognized acquisition-related contingent consideration on the balance sheets in accordance with the acquisition method of accounting. See “— Acquisitions and Divestitures” for more information. The fair value of contingent consideration liability is determined based on a probability-weighted income approach derived from revenue estimates and a probability assessment with respect to the likelihood of achieving regulatory and commercial milestone obligations and royalty obligations. The fair value of acquisition related contingent consideration is remeasured each reporting period with changes in fair value recorded in the condensed consolidated statements of operations. Changes in contingent consideration fair value estimates result in an increase or decrease in our contingent consideration obligation and a corresponding charge or reduction to operating results. Key elements of the contingent consideration are regulatory milestone payments, sales milestone payments and royalty payments. Regulatory payments are due on regulatory approval of certain cell types in the United States and the European Union. Regulatory milestone payments are one time but are due prior to any potential commercial success of a cell type in a specific indication. Royalty payments are a percentage of net sales. Sales milestone payments are due when certain aggregate sales thresholds have been met. Management must use substantial judgment in evaluating the value of the contingent consideration. Estimates used by management include but are not limited to: (i) the number and type of clinical programs that we are likely to pursue based on the quality of our preclinical data, (ii) the time required to conduct clinical trials, (iii) the odds of regulatory success in those trials, (iv) the potential number of patients treatable for the indications in which we are successful and (v) the pricing of treatments that achieve commercial status. All of these areas involve substantial judgment on the part of management and are inherently uncertain.
37
Results of Operations
Comparison of Three Months Ended March 31, 2023 to March 31, 2022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
|
|
Percent |
|
|
|
2023 |
|
|
2022 |
|
|
Increase (Decrease) |
|
|
Increase (Decrease) |
|
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Product sales and rentals |
|
$ |
1,043 |
|
|
$ |
651 |
|
|
|
392 |
|
|
|
60.2 |
% |
Services |
|
|
1,357 |
|
|
|
1,283 |
|
|
|
74 |
|
|
|
5.8 |
% |
License, royalty and other |
|
|
1,535 |
|
|
|
4,001 |
|
|
|
(2,466 |
) |
|
|
(61.6 |
)% |
Total revenues |
|
|
3,935 |
|
|
|
5,935 |
|
|
|
(2,000 |
) |
|
|
(33.7 |
)% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues (excluding amortization of acquired intangible assets) |
|
|
|
|
|
|
|
|
|
|
|
|
Product sales and rentals |
|
|
722 |
|
|
|
474 |
|
|
|
248 |
|
|
|
52.3 |
% |
Services |
|
|
472 |
|
|
|
948 |
|
|
|
(476 |
) |
|
|
(50.2 |
)% |
License, royalty and other |
|
|
809 |
|
|
|
2,604 |
|
|
|
(1,795 |
) |
|
|
(68.9 |
)% |
Research and development |
|
|
16,951 |
|
|
|
21,673 |
|
|
|
(4,722 |
) |
|
|
(21.8 |
)% |
Software cease-use costs |
|
|
23,675 |
|
|
|
— |
|
|
|
23,675 |
|
|
|
100.0 |
% |
Selling, general and administrative |
|
|
13,934 |
|
|
|
16,460 |
|
|
|
(2,526 |
) |
|
|
(15.3 |
)% |
Change in fair value of contingent consideration liability |
|
|
(18,932 |
) |
|
|
4,849 |
|
|
|
(23,781 |
) |
|
|
(490.4 |
)% |
Goodwill impairment |
|
|
29,633 |
|
|
|
— |
|
|
|
29,633 |
|
|
|
100.0 |
% |
Amortization of acquired intangible assets |
|
|
541 |
|
|
|
541 |
|
|
|
- |
|
|
|
— |
% |
Total operating expense |
|
|
67,805 |
|
|
|
47,549 |
|
|
|
20,256 |
|
|
|
42.6 |
% |
Loss from operations |
|
$ |
(63,870 |
) |
|
$ |
(41,614 |
) |
|
$ |
(22,256 |
) |
|
|
53.5 |
% |
Net Revenues and Cost of Revenues
Net revenues for the three months ended March 31, 2023 was $3.9 million, a decrease of $2.0 million, or 33.7% compared to the prior year period. The decrease was primarily due to $2.5 million decrease in license, royalty and other revenues driven by decreased product sales to distribution partners.
Cost of revenues for the three months ended March 31, 2023 was $2.0 million, a decrease of $2.0 million, or 50.2% compared to the prior year period. The decrease was primarily driven by lower sales to our distribution partners corresponding to our decrease in license, royalty and other revenues.
Research and Development Expenses
Research and development expenses for the three months ended March 31, 2023 were $17.0 million, a decrease of $4.7 million, or 21.8% compared to the prior year period. The decrease was primarily due to a reduction in allocated costs from the prior period as well as lower lab supplies and personnel costs partially offset by $3.0 million purchase of acquired IPR&D with no alternative future use expensed during the three months ended March 31, 2023.
Software Cease-Use Costs
Software cease-use costs for the three months ended March 31, 2023 was $23.7 million compared to $0 for the prior period due to the recognition of the remaining contract value associated with the Palantir platform fees. See Note 9 to our unaudited condensed consolidated financial statements included elsewhere in this quarterly report on Form 10-Q for additional information related to the Palantir agreement.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended March 31, 2023 were $13.9 million, a decrease of $2.5 million, or 15.3% compared to the prior year period. The primary reason for the decrease was driven by lower personnel costs and lower consulting expenses.
Change in Fair Value of Contingent Consideration Liability
38
The change in fair value of contingent consideration liability for the three months ended March 31, 2023 was $18.9 million, a decrease of $23.8 million, or 490.4% compared to the period year period. The decrease resulted from a change in market-based assumptions (for more information about changes in the fair value of contingent consideration liability refer to Note 3, “Fair Value of Financial Assets and Liabilities” in our unaudited condensed consolidated financial statements included elsewhere in this quarterly report on Form 10-Q).
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|
|
|
|
Percent |
|
|
|
2023 |
|
|
2022 |
|
|
Increase (Decrease) |
|
|
Increase (Decrease) |
|
Interest income |
|
$ |
116 |
|
|
$ |
6 |
|
|
$ |
110 |
|
|
|
1833.3 |
% |
Interest expense |
|
|
(277 |
) |
|
|
— |
|
|
|
(277 |
) |
|
|
100.0 |
% |
Change in fair value of warrant liabilities |
|
|
1,735 |
|
|
|
(20,932 |
) |
|
|
22,667 |
|
|
|
(108.3 |
)% |
Change in fair value of debt |
|
|
(1,280 |
) |
|
|
— |
|
|
|
(1,280 |
) |
|
|
100.0 |
% |
Other expense, net |
|
|
(441 |
) |
|
|
(327 |
) |
|
|
(114 |
) |
|
|
34.9 |
% |
Total other income (expense) |
|
$ |
(147 |
) |
|
$ |
(21,253 |
) |
|
$ |
21,106 |
|
|
|
(99.3 |
)% |
For the three months ended March 31, 2023, other income (expense) increased by $21.1 million compared to the prior year period. The increase was primarily related to a change in the fair value of the warrant liabilities due to the decrease in the price of our Class A common stock (see Note 3, “Fair Value of Financial Assets and Liabilities” in our unaudited condensed consolidated financial statements included elsewhere in this quarterly report on Form 10-Q).
Liquidity and Capital Resources
As of March 31, 2023, we had $8.5 million of cash and cash equivalents and an accumulated deficit of $709.5 million. Our primary use of our capital resources is funding our operating expenses, which consist primarily of funding the research and development of our cellular therapeutic candidates, and to a lesser extent, selling, general and administrative expenses.
As of the issuance date, we had approximately $5.7 million of unrestricted cash and cash equivalents available to fund our operations and no available additional sources of outside capital to sustain our operations for a period of 12 months beyond the issuance date. These uncertainties raise substantial doubt about our ability to continue as a going concern. Refer to the Going Concern section above for further details.
To date, we have not had any cellular therapeutics approved for sale and have not generated any revenues from the sale of our cellular therapeutics. We generate limited revenues from our biobanking and degenerative disease businesses. We do not expect to generate any revenues from cellular therapeutic product sales unless and until we successfully complete development and obtain regulatory approval for one or more of our therapeutic candidates, which we expect will take a number of years. If we obtain regulatory approval for any of our therapeutic candidates, we expect to incur significant commercialization expenses related to therapeutic sales, marketing, manufacturing and distribution as our current commercialization efforts are limited to our biobanking and degenerative disease businesses. As a result, until such time, if ever, as we can generate substantial revenue from therapeutics and sales of our biomaterials products, we expect to finance our cash needs through equity offerings, debt financings or other capital sources, including potentially collaborations, licenses and other similar arrangements, including drawdowns under the At-The-Market Sales Agreement, dated as of September 8, 2022, by and between us and BTIG, LLC, Oppenheimer & Co. Inc. and B. Riley Securities, Inc., or the ATM Program, and we continue to explore licensing and collaboration arrangements for our cellular therapeutics as well as distribution arrangements for our degenerative disease business including our distribution agreements with CH Trade Group, Tamer and AD Ports to support expansion abroad. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. Any failure to raise capital as and when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies. Failure to obtain this necessary capital or address our liquidity needs may force us to delay, limit or terminate our operations, make further reductions in our workforce, discontinue our commercialization efforts for our biomaterials products as well as other clinical trial programs, liquidate all or a portion of our assets or pursue other strategic alternatives, and/or seek protection under the provisions of the U.S. Bankruptcy Code.
We expect to incur substantial expenses in the foreseeable future for the development and potential commercialization of our cellular therapeutic candidates, expansion of our degenerative disease business and ongoing internal research and development programs. At this time, we cannot reasonably estimate the nature, timing or aggregate amount of costs for our development, potential commercialization, and internal research and development programs. However, to complete our current and future preclinical studies and clinical trials, and to complete the process of obtaining regulatory approval for our therapeutic candidates, as well as to build the sales, marketing and distribution infrastructure that we believe will be necessary to commercialize our cellular therapeutic candidates, if approved, and biomaterials products we may require substantial additional funding in the future.
39
To date, inflation has not had a significant impact on our business. However, any significant increase in inflation and interest rates could have a significant effect on the economy in general and, thereby, could affect our future operating results.
Cash Flows
The following table summarizes our cash flows for the three months ended March 31, 2023 and 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|
|
2023 |
|
|
2022 |
|
|
Change |
|
Cash (used in)/provided by |
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
(14,995 |
) |
|
$ |
(34,253 |
) |
|
$ |
19,258 |
|
Investing activities |
|
|
(3,209 |
) |
|
|
(1,454 |
) |
|
|
(1,755 |
) |
Financing activities |
|
|
12,759 |
|
|
|
46,495 |
|
|
|
(33,736 |
) |
Net change in cash, cash equivalents and restricted cash |
|
$ |
(5,445 |
) |
|
$ |
10,788 |
|
|
$ |
(16,233 |
) |
Operating Activities
Net cash used in operations for the three months ended March 31, 2023 was $19.3 million lower than the prior year period, primarily due to adjustments for non-cash items and recognition of the Palantir cease-use liability (see Note 9).
Investing Activities
We used $3.2 million and $1.5 million of net cash in investing activities for the three months ended March 31, 2023 and 2022, respectively, which consisted of capital expenditures in each period and $3.0 million used to acquire in-process research and development for the three months ended March 31, 2023.
Financing Activities
We generated $12.8 million of net cash from financing activities for the three months ended March 31, 2023, which consisted of $9.0 million from the March 2023 private placement, $5.0 million of proceeds from the Starr Bridge Loan, partially offset by $1.6 million of principal repayments on the Yorkville PPA. For the three months ended March 31, 2022 we generated $46.5 million of net cash in financing activities, which consisted primarily of $46.5 million in cash proceeds from the exercise of warrants to acquire 13,281,386 shares of our Class A common stock.
Critical Accounting Estimates
Our significant accounting policies are summarized in Note 2, “Summary of Significant Accounting Policies,” included within the Notes to our unaudited condensed consolidated financial statements included elsewhere in this quarterly report on Form 10-Q and in Note 2 to our audited annual financial statements included in the 2022 Form 10-K.
There have been no significant changes in our critical accounting policies during the three months ended March 31, 2023 as compared with those previously disclosed in the 2022 Form 10-K.
Recent Accounting Pronouncements
See Note 2 to our unaudited condensed consolidated financial statements included herein and Note 2 to our audited annual financial statements for the year ended December 31, 2022 included in the 2022 Form 10-K for information about recent accounting pronouncements, the timing of their adoption, and our assessment, to the extent we have made one, of their potential impact on our financial condition and results of operations.
JOBS Act Accounting Election
We are an “emerging growth company,” as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies.
We have elected to use this extended transition period to enable us to comply with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our
40
financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.