CELULARITY INC. 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 2021 Form 10-K. These risks could cause our actual results to differ materially from any future performance suggested below.
Overview
We are a clinical-stage 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 allogenic cell therapy product candidates including T cells engineered with a CAR, NK cells, and mesenchymal-like ASCs. 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 currently have three active clinical trials and intend to work with the FDA to resolve its questions on an IND we submitted in the first quarter of 2022 before commencing an additional clinical trial. 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-builtU.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 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 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 four allogeneic cell types: T cells, unmodified NK cells, genetically modified NK cells and ASCs, which are used in five key cell therapeutic programs-CYCART-19, CYNK-001, CYNK-101, APPL-001, and PDA-002-that in turn are focused on six initial indications. CYCART-19 is a placental-derived CAR-T cell therapy, in development for the treatment of B-cell malignancies, initially targeting the CD19 receptor, the construct and related CARs for which are in-licensed from Sorrento. We submitted an IND to investigate CYCART-19 for treatment of B-cell malignancies and in lateMay 2022 , received formal written communication from FDA requesting additional information before we can proceed with the planned Phase 1/2 clinical trial. We plan to work with the FDA in an effort to resolve its questions as promptly as possible. We expect to commence the trial upon clearance of the IND. CYNK-001 is a placental-derived unmodified NK cell in development for the treatment of AML, a blood cancer, and for GBM, a solid tumor cancer. CYNK-001 is currently in Phase 1 trial for AML and a Phase 1/2a trial for GBM, respectively. CYNK-101 is genetically modified version of a placental-derived NK-cell. We initiated a Phase 1 trial of CYNK-101 in patients with HER2+ gastric and gastroesophageal cancers during the fourth quarter. CYNK-101 will be evaluated in combination with monoclonal antibodies, or mAbs to target HER2+ (traztuzumab) and PDl-1 (pembrolizumab). APPL-001 is a placenta-derived ASC being developed for the treatment of Crohn's disease, a degenerative disease. PDA-002 is a placenta-derived ASC being developed for the treatment of facioscapulohumeral muscular dystrophy, or FSHD. 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 CMC, advanced cell manufacturing and cryopreservation. The result is a suite of allogeneic inventory-ready, on demand placental-derived cell therapy products. In addition, we have non-core legacy operations that are complementary to our work in placenta-derived cell therapeutics, including biobanking operations that include the collection, processing and cryogenic storage of certain birth byproducts for third-parties, and our degenerative disease business consists of the manufacture and sale of our Biovance and Interfyl products, directly and through our third-party distribution agreement. See "- Commercial Businesses" for more information regarding these operations. 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, a company founded under the nameLifebank in 1998 byRobert J. Hariri , M.D., Ph.D., our founder and Chief Executive Officer, and acquired in 2002 by Celgene. The team continued to hone their expertise in the field of placental-derived technology at Celgene throughAugust 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 30 --------------------------------------------------------------------------------
the rapid development and, if approved, commercialization of these potentially lifesaving therapies for patients with unmet medical needs.
Since inception, we have had significant operating losses. We had a net loss of$15.0 million and$100.1 million for the six months endedJune 30, 2022 and year endedDecember 31, 2021 , respectively. We had an accumulated deficit of$674.7 million atJune 30, 2022 . Our primary use of cash is to fund operations, which consist primarily of research and development expenses, and to a lesser extent, selling, general and administrative expenses. Cash used to fund operating expenses is impacted by the timing of when it pays these expenses, as reflected in the change in our outstanding accounts payable and accrued expenses. We expect to continue to incur net losses for the foreseeable future, and expect our research and development expenses, selling, general and administrative expenses, and capital expenditures will continue to increase. In particular, we expect our expenses and losses to increase as we continue development of, and seek regulatory approvals for, our therapeutic candidates, and begin to commercialize any approved therapeutics, as well as hire additional personnel, develop commercial infrastructure for therapeutics, pay fees to outside consultants, lawyers and accountants, and incur increased costs associated with being a public company such as expenses related to services associated with maintaining compliance with Nasdaq listing rules andSEC requirements, insurance and investor relations costs. Our net losses may fluctuate significantly depending on the timing of our clinical trials and our expenditures on other research and development activities. Based upon our current operating plan, we do not believe that our existing cash and cash equivalents as ofJune 30, 2022 will be sufficient to fund our operating expenses and capital expenditure requirements through the next 12 months. 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, we expect to finance our cash needs through equity offerings, debt financings or other capital sources, including potentially collaborations, licenses and other similar arrangements. 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. If we are unable to raise capital, we will need to delay, reduce or terminate planned activities to reduce costs.
COVID-19 Pandemic
The COVID-19 pandemic resulted in increased unemployment, commodity and stock market volatility during the acute phase of the epidemic. Increases in vaccination rates and lower levels of reported cases suggest that the worst part of the pandemic may have passed. Should a new or mutated variant arise that results in further measures to combat its spread, there could be an adverse material impact to our financial condition, operating results, and timing and amounts of cash flows. Although we were able to operate continuously throughout 2020, 2021 and thus far in 2022, we implemented "work from home" policies as needed following local health recommendations for non-essential employees and employees whose roles are able to be performed remotely. Management of remote workers can present special challenges and productivity may not be as high for remote workers. Because certain elements of our operations (such as processing placental tissue, certain biological assays, translational research and storage of cord blood) cannot be performed remotely, we instituted controls and protocols including mandatory temperature checking, symptom assessment forms, incremental cleaning and sanitization of common surfaces to mitigate risks to employees. Although we have not experienced any material disruption to date, there can be no assurance that our mitigation measures will continue to be effective and that there will not be a disruption to an important element of our business in the future. Due to a broad decline in economic activity and restrictions on physical access to certain medical facilities, we did experience a decrease in the net revenues of our degenerative disease business due to the pandemic. As for clinical trials, we did not cancel or postpone enrollment solely due to the risks of COVID-19. However, enrollment in the clinical trial evaluating CYNK-001 for AML experienced some delays in the first half of 2020 and in mid 2021 as sites assessed their safety protocols and experienced high volumes of COVID-19 patients. We had a year-over-year increase in research and development expenses in 2021 notwithstanding the enrollment delays. The extent to which COVID-19 or any other health epidemic may impact our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others. Accordingly, COVID-19 could have a material adverse effect on our business, results of operations, financial condition, and prospects.
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 31 -------------------------------------------------------------------------------- development. All of the cell therapy programs fall into theCell 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 and Interfyl. 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 Reporting" 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 divestures 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. InMay 2017 , we acquiredHLI Cellular Therapeutics, LLC , or HLI CT, fromHuman Longevity Inc. , or Human Longevity. 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 were subject to an exclusive distribution arrangement withAlliqua Biomedical, Inc. , or Alliqua. InMay 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. InAugust 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. InOctober 2018 , we acquiredCariCord Inc. , or CariCord, a family cord blood bank established by ClinImmune Labs University of ColoradoCord Blood Bank and the Regents of theUniversity of Colorado , a body corporate, for and on behalf of theUniversity 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. InSeptember 2020 , we entered into a license and transfer agreement, or the Sorrento Agreement, with Sorrento.Henry Ji , Ph.D., a former member of LegacyCelularity's board of directors, currently serves as President and Chief Executive Officer of Sorrento. Sorrento is also a significant stockholder of our company and invested in theJuly 2021 PIPE Financing concurrent with the closing of the Business Combination. 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. InAugust 2017 , in connection with the Anthrogenesis acquisition, we entered into a license agreement, or the Celgene License, with Celgene, which has since been acquired byBristol 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. InAugust 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 LegacyCelularity issued one 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 32 -------------------------------------------------------------------------------- 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, andAugust 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 human cells, tissues and cellular and tissue-based products, or HCT/P's, including Biovance, Biovance 3L, Interfyl and MIST/UltraMIST Therapy System equipment and single-use applicators of which our direct sales are included in Product Sales and Rentals while sales through our network of distribution partners are included in License, Royalty and Other; (ii) the collection, processing and storage of umbilical cord and placental blood and tissue after full-term pregnancies, collectively, Services; and, (iii) license fees and royalties received under the license agreement withSanuwave through the third quarter of 2021 included in License, Royalty and Other.
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 and Interfyl product lines. License, royalty and other costs reflect expenses incurred related to our distribution agreements.
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, 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. We anticipate that our research and development expenditures will increase as we engage in further clinical trials, investigate incremental CAR constructs for our allogeneic T-cell and NK cell platforms and conduct further pre-clinical studies on CYNK-101 in conjunction with various antibody candidates. The amount of increase 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
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 general and administrative expense and those expenses are recognized when incurred. We expect that as we engage in more clinical trials and potentially prepares for commercialization of any approved therapies that our general and administrative costs will increase over time. The magnitude and timing of any increase in general and administrative expense will depend on the progress of clinical trials, the release of new products within the degenerative disease portfolio, changes in the regulatory environment or incremental staffing needs to support the growth of the business as well as any incremental expenses associated with being a public company.
Change in fair value of contingent consideration liability
Because the acquisitions of Anthrogenesis from Celgene and HLI CT from Human
Longevity 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
33
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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 judgement 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 judgement on the part
of management and are inherently uncertain.
Results of Operations
Comparison of Three Months Ended
Three Months Ended Percent
Increase Increase
June 30, 2022 June 30, 2021 (Decrease) (Decrease)
Net revenues
Product sales and rentals $ 1,228 $ 1,045 $ 183 17.5 %
Services 1,373 1,597 (224 ) (14.0 )%
License, royalty and other 1,175 555 620 111.7 %
Total revenues 3,776 3,197 579 18.1 %
Operating expenses:
Cost of revenues (excluding amortization
of acquired
intangible assets)
Product sales and rentals 425 869 (444 ) (51.1 )%
Services 1,265 571 694 121.5 %
License, royalty and other 1,489 - 1,489 100.0 %
Research and development 25,349 22,911 2,438 10.6 %
Selling, general and administrative 15,574 28,863 (13,289 ) (46.0 )%
Change in fair value of contingent
consideration liability (45,047 ) 10,048 (55,095 ) (548.3 )%
Amortization of acquired intangible
assets 546 546 - -
Total operating expenses (399 ) 63,808 (64,207 ) (100.6 )%
Income (loss) from operations $ 4,175 $ (60,611 ) $ 64,786 (106.9 )%
Net Revenues and Cost of Revenues
Net revenues for the three months ended
Cost of revenues for the three months endedJune 30, 2022 was$3.2 million , an increase of$1.7 million , or 120.8% compared to the prior year period. The increase was primarily driven by higher sales to distribution partners corresponding to our increase in license, royalty and other revenues in addition to higher cost resulting from product mix as well as increased material and labor costs.
Research and Development Expenses
Research and development expenses for the three months endedJune 30, 2022 were$25.3 million , an increase of$2.4 million , or 10.6% compared to the prior year period. The increase was driven by higher clinical trial costs and higher personnel costs as we continue to enroll new cohorts in both arms of the Phase 1 AML study for CYNK-001 and continue advancing the Phase 1 portion of a Phase 1/2a clinical trial in advanced HER2+ gastric cancer for CYNK-101.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months endedJune 30, 2022 were$15.6 million , a decrease of$13.3 million , or 46% compared to the prior year period. The decrease was primarily driven by a reduction in stock-based compensation expense of$24.3 million related to prior year awards granted to our board of directors and senior management offset by a$5.0 million 34 -------------------------------------------------------------------------------- increase in expenses allocated to research and development, higher personnel costs of$4.0 million , insurance costs of$1.4 million as well as professional services costs to support operations of a public company.
Change in Fair Value of Contingent Consideration Liability
The change in fair value of contingent consideration liability for the three months endedJune 30, 2022 was$(45.0) million , a decrease of$55.1 million , or 548.3% 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 4, "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) Three Months Ended Percent Increase Increase June 30, 2022 June 30, 2021 (Decrease) (Decrease) Interest income $ 41 $ 129$ (88 ) (68.2 )% Interest expense - (817 ) 817 (100.0 )% Change in fair value of warrant liabilities 43,212 (1,174 ) 44,386 (3780.8 )% Other, net 415 (2,004 ) 2,419 (120.7 )% Total other income (expense)$ 43,668 $ (3,866 ) $ 47,534 (1229.5 )% For the three months endedJune 30, 2022 , other income (expense), net increased by$47.5 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 common stock (see Note 4, "Fair Value of Financial Assets and Liabilities" in our unaudited condensed consolidated financial statements included elsewhere in this quarterly report on Form 10-Q).
Comparison of Six Months Ended
Six Months Ended Percent
Increase Increase
June 30, 2022 June 30, 2021 (Decrease) (Decrease)
Net revenues
Product sales and rentals $ 1,879 $ 1,885 $ (6 ) (0.3 )%
Services 2,656 2,861 (205 ) (7.2 )%
License, royalty and other 5,176 1,111 4,065 365.9 %
Total revenues 9,711 5,857 3,854 65.8 %
Operating expenses:
Cost of goods sold (excluding
amortization of acquired
intangible assets)
Product sales and rentals 899 1,387 (488 ) (35.2 )%
Services 2,213 1,295 918 70.9 %
License, royalty and other 4,093 - 4,093 -
Research and development 47,022 39,901 7,121 17.8 %
Selling, general and administrative 32,034 36,489 (4,455 ) (12.2 )%
Change in fair value of contingent
consideration liability (40,198 ) 30,704 (70,902 ) (230.9 )%
Amortization of acquired intangible
assets 1,087 1,087 - -
Total operating expenses 47,150 110,863 (63,713 ) (57.5 )%
Loss from operations $ (37,439 ) $ (105,006 ) $ 67,567 (64.3 )%
Net Revenues and Cost of Revenues
Net revenues for the six months ended
Cost of revenues for the six months endedJune 30, 2022 was$7.2 million , an increase of$4.5 million , or 168.6% compared to the prior year period. The increase was primarily driven by higher sales to distribution partners corresponding to our increase in license, royalty and other revenues in addition to higher cost resulting from product mix as well as increased material and labor costs. 35 --------------------------------------------------------------------------------
Research and Development Expenses
Research and development expenses for the six months endedJune 30, 2022 were$47.0 million , an increase of$7.1 million , or 17.8% compared to the prior year period. The increase was primarily driven by the Palantir platform fees, higher personnel costs and laboratory supplies to support cell therapy process development.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the six months endedJune 30, 2022 were$32.0 million , a decrease of$4.5 million , or 12.2% compared to the prior year period. The decrease was primarily driven by a reduction in stock-based compensation expense of$22.8 million related to prior year awards granted to our board of directors and senior management a portion of which was allocated to research and development expense offset by higher personnel, professional services and, insurance costs to support operations of a public company.
Change in Fair Value of Contingent Consideration Liability
Change in fair value of contingent consideration liability for the six months endedJune 30, 2022 was$(40.2) million , a decrease of$70.9 million , or 230.9% compared to the prior 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 4, "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) Six Months Ended Percent Increase Increase June 30, 2022 June 30, 2021 (Decrease) (Decrease) Interest income $ 47 $ 269$ (222 ) (82.5 )% Interest expense - (1,569 ) 1,569 (100.0 )% Change in fair value of warrant liabilities 22,280 (37,679 ) 59,959 (159.1 )% Other expense, net 88 (2,031 ) 2,119 (104.3 )% Total other income (expense)$ 22,415 $ (41,010 ) $ 63,425 (154.7 )% For the six months endedJune 30, 2022 , other income (expense), net increased by$63.4 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 common stock (see Note 4, "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
Since inception throughJune 30, 2022 , Legacy Celularity funded its operations primarily through the sale of convertible preferred stock, sale of common stock and via the Business Combination and has raised aggregate net cash proceeds of$510.4 million . As ofJune 30, 2022 , we had$38.0 million of cash and cash equivalents and an accumulated deficit of$674.7 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. Based upon our current operating plan, we do not believe that our existing cash and cash equivalents as ofJune 30, 2022 , will be sufficient to fund our operating expenses and capital expenditure requirements through the next 12 months. We believe our existing cash and cash equivalents as ofJune 30, 2022 will fund us into the fourth quarter of 2022. We have based this estimate on a number of assumptions regarding our development programs and commercial operations that may prove to be wrong, and we could utilize our cash and cash equivalents sooner than we expect. We are seeking additional funding through the issuance of equity, convertible or debt securities through private placements or public offerings or through the exercise of existing convertible securities. We may not be able to obtain financing on acceptable terms, or at all, and the terms of any financing may adversely affect the holdings or the rights of our stockholders. Alternatively, we may have to reduce spend by postponing certain of our development activities. Based on our recurring losses from operations incurred since inception, expectation of continuing operating losses for the foreseeable future, and need to raise additional capital to finance our future operations, we have concluded that there is substantial doubt about our ability to continue as a going concern. We expect to incur substantial expenses in the foreseeable future for the development and potential commercialization of our cellular therapeutic candidates 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 36 --------------------------------------------------------------------------------
will be necessary to commercialize our cellular therapeutic candidates, if approved, we may require substantial additional funding in the future.
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 six months endedJune 30, 2022 and 2021: Six Months Ended June 30, 2022 June 30, 2021 Change Cash provided by (used in) Operating activities$ (70,571 ) $ (43,280 ) $ (27,291 ) Investing activities (2,894 ) (2,487 ) (407 ) Financing activities 74,214 (827 ) 75,041 Net change in cash, cash equivalents and restricted cash $ 749$ (46,594 ) $ 47,343 Operating Activities
Net cash used in operations for the six months ended
Investing Activities
We used$2.9 million and$2.4 of net cash in investing activities for the six months endedJune 30, 2022 and 2021, which consisted of capital expenditures in each period offset by$0.3 million in gross proceeds from promissory note in the six months endedJune 30, 2021 .
Financing Activities
We generated$74.2 million of net cash from financing activities for the six months endedJune 30, 2022 , which consisted primarily of$46.5 million in cash proceeds from the exercise of warrants to acquire 13,281,386 shares of Class A Common Stock and$27.5 million in cash proceeds from theMay 2022 PIPE financing. For the six months endedJune 30, 2021 we used$0.8 million of net cash in financing activities, which consisted primarily of payments related to theJuly 2021 PIPE Financing that closed concurrent with the Business Combination offset by proceeds from short term borrowing - related party.
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 annual financial statements included in the 2021 Form 10-K. During the six months endedJune 30, 2022 , there was an addition to our critical accounting estimates compared with those previously disclosed in the 2021 Form 10-K as a result of the implementation of Accounting Standards Update 2016-02. We cannot readily determine the interest rate implicit in the lease, therefore, we use our incremental borrowing rate or IBR to measure lease liabilities. The IBR is the rate of interest that we would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use or ROU asset in a similar economic environment. The IBR therefore reflects what we 'would have to pay', which requires estimation when no observable rates are available or when they need to be adjusted to reflect the terms and conditions of the lease. We estimate the IBR using observable inputs (such as market interest rates) when available and are required to make certain entity and asset-specific estimates. The IBR used in the calculation of the present value of lease payments in calculating lease liabilities and the corresponding ROU requires the use of significant judgment by management.
Recent Accounting Pronouncements
See Note 2 to our unaudited condensed consolidated financial statements included herein and Note 2 to our annual financial statements for the year endedDecember 31, 2021 included in the 2021 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 of results of operations. 37 --------------------------------------------------------------------------------
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 financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
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