(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The matters addressed in this Item 2 that are not historical information constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, including statements about any of the following: any projections of earnings, revenue, cash, effective tax rate, use of net operating losses, or any other financial items; the plans, strategies and objectives of management for future operations or prospects for achieving such plans, and any statements of assumptions underlying any of the foregoing. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks," "estimates," and similar expressions are intended to identify forward-looking statements. While AgeX may elect to update forward-looking statements in the future, it specifically disclaims any obligation to do so, even if the AgeX estimates change and readers should not rely on those forward-looking statements as representing AgeX views as of any date subsequent to the date of the filing of this Quarterly Report. Although we believe that the expectations reflected in these forward-looking statements are reasonable, such statements are inherently subject to risks and AgeX can give no assurances that its expectations will prove to be correct. Actual results could differ materially from those described in this report because of numerous factors, many of which are beyond the control of AgeX. A number of important factors could cause the results of the company to differ materially from those indicated by such forward-looking statements, including those detailed under the heading "Risk Factors" in this Form 10-Q, our Form 10-K for the year ended December 31, 2019, and our other reports filed with the SEC from time to time.
The following discussion should be read in conjunction with AgeX's condensed consolidated interim financial statements and the related notes provided under "Item 1- Financial Statements" above.
Critical Accounting Policies
This Management's Discussion and Analysis of Financial Condition and Results of Operations discusses and analyzes data in our unaudited condensed consolidated interim financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. Preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors. Actual conditions may differ from our assumptions and actual results may differ from our estimates.
An accounting policy is deemed critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate are reasonably likely to occur, that could materially impact the financial statements. Management believes that there have been no significant changes during the three months ended March 31, 2020 to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2019, except as disclosed in Note 2 of our condensed consolidated interim financial statements included elsewhere in this Report.
Results of Operations Comparison of Three Months Ended March 31, 2020 and 2019 Revenues and Cost of Sales The amounts in the table below show our consolidated revenues by source and cost of sales for the periods presented (in thousands). Three Months Ended March 31, (unaudited) $ Increase/ % Increase/ 2020 2019 (Decrease) (Decrease) Subscription and advertisement revenues $ 338 $ 345 $ (7 ) (2.0 )% Grant revenues 86 15 71 *% Other 91 28 63 *% Total revenues 515 388 127 32.7 % Cost of sales (34 ) (63 ) (29 ) (46.1 )% Gross profit $ 481 $ 325 $ 156 48.0 %
* Not meaningful.
Our revenues were primarily generated by LifeMap Sciences, as subscription and advertisement revenues from its GeneCards(R) online database. Subscription and advertisement revenues amounted to $338,000 and $345,000 for the three months ended March 31, 2020 and 2019, respectively.
During the three months ended March 31, 2020, we recognized income of approximately $86,000 and $15,000, respectively, from a grant from the NIH. Other revenues of $91,000 for the three months ended March 31, 2020 were generated entirely from non-recurring service revenues associated with LifeMap Sciences' online database business primarily related to its GeneCards(R) database.
Cost of sales for the three months ended March 31, 2020 as compared to the same period in 2019 decreased by $29,000 primarily due to decrease in the fixed annual royalties on the GeneCards(R) online database from $179,000 in 2019 to $132,000 in 2020.
We have made certain adjustments to our operating plans and budgets to reduce our cash expenditures in order to extend the period over which we can continue our operations with our available cash resources. These adjustments entailed a staff force reduction, primarily research and development personnel effective May 1, 2020. As a result of those staff reductions and related adjustments to our operating budgets we expect that our operating expenses, particularly those related to research and development, for periods after March 31, 2020 will be lower than our expenses for the three months ended March 31, 2020 shown in this Report. However, we paid approximately $105,000 in accrued payroll and unused paid time off and other benefits, and we expect to recognize approximately $194,800 in restructuring charges in connection with the reduction in staffing, consisting of contractual severance ,substantially all of which are expected to be settled in cash, which will be reflected in our operating results for the second quarter of 2020.
The following table shows our consolidated operating expenses for the periods presented (in thousands).
Three Months Ended March 31, (unaudited) $ Increase/ % Increase/ 2020 2019 (Decrease) (Decrease) Research and development expenses $ 1,603 $ 1,338 $ 265 19.8 % General and administrative expenses 2,073 2,109 (36 ) (1.7 )%
Research and development expenses
Research and development expenses increased by $0.3 million to $1.6 million during the three months ended March 31, 2020 from $1.3 million during the same period in 2019. The increase was primarily attributable to an increase of $0.2 million in scientific consultants, $0.2 million in laboratory facilities and equipment related expenses and maintenance, $0.1 million in personnel related expenses allocable to research and development, and $0.1 million in depreciation and amortization of laboratory equipment and improvements. These increases were offset to some extent by a decrease of $0.3 million in shared services from Lineage with the termination of the Shared Facilities and Services Agreement on September 30, 2019.
The following tables show the amounts and percentages of our total research and development expenses allocated to our primary research and development programs during the three months ended March 31, 2020 and 2019 (amounts in thousands).
Three Months Ended March 31, (unaudited) Amount (1) Percent of Total Company Program 2020 2019 2020 2019 PureStem� progenitor cell lines, brown adipose fat, iTR technology, and pre-clinical AgeX including cardiovascular ReCyte Therapeutics, therapy research and Inc. development $ 1,221 $ 969 76.2 % 72.4 % Biomedical, gene, and disease LifeMap Sciences databases and tools 382 369 23.8 % 27.6 % Total research and development expenses $ 1,603 $ 1,338 100.0 % 100.0
(1) Amount includes research and development expenses incurred both directly by us or the named subsidiary and for 2019 indirect overhead expenses allocated by Lineage that benefited or supported our research and development programs. See Notes 2 and 4 to our condensed consolidated interim financial statements included elsewhere in this Report.
General and administrative expenses
The following tables show the amount of general and administrative expenses of AgeX and named subsidiaries during the three months ended March 31, 2020 and 2019 (in thousands):
Three Months Ended March 31, (unaudited) Amount Percent of Total Company 2020 2019(1) 2020 2019 AgeX including ReCyte Therapeutics, Inc. $ 1,875 $ 1,891 90.4 % 89.7 % LifeMap Sciences 198 218 9.6 % 10.3 % Total general and administrative expenses $ 2,073 $ 2,109 100.0 % 100.0 %
(1) Amount includes direct expenses incurred by us or the named subsidiary and indirect overhead costs allocated by Lineage that benefit or support our general and administrative function. See Notes 2 and 4 to our condensed consolidated interim financial statements included in this Report.
General and administrative expenses for the three months ended March 31, 2020 of $2.1 million is consistent with the same period in 2019 despite bearing the full lease and facilities related costs since April 2019, and an increase in head count with the employment of its own finance team since October 1, 2019. These increases were offset by a decrease in shared facilities and services fees from Lineage following the termination of the Shared Facilities and Services Agreement on September 30, 2019.
Other income (expense), net
Other income and expenses, net, in 2020 and 2019 consist primarily of net foreign currency transaction gains and losses recognized by LifeMap Sciences for intercompany payables and receivables denominated in currency other than United States dollars, gain on disposition of assets, and interest income and interest expense, net.
For Federal and California purposes, our activity through August 30, 2018 was included in Lineage's federal consolidated and California combined tax returns. For the three months ended March 31, 2020, the provision for income taxes has been presented on a separate federal consolidated tax return and a California combined tax return using the separate return method, as we will file separately from Lineage for periods after August 30, 2018, the date in which Lineage deconsolidated AgeX as discussed in Note 7 to our condensed consolidated interim financial statements included elsewhere in this Report.
Beginning in 2018, the 2017 Tax Act subjects a U.S. stockholder to tax on Global Intangible Low Tax Income "GILTI" earned by certain foreign subsidiaries. In general, GILTI is the excess of a U.S. shareholder's total net foreign income over a deemed return on tangible assets. The provision further allows a deduction of 50% of GILTI, however this deduction is limited to the company's pre-GILTI U.S. income. For the year ended December 31, 2018, we included an immaterial amount of GILTI in U.S. gross income related to LifeMap Sciences, Ltd., which was fully offset by current year operating losses. For the year ended December 31, 2019, our foreign income inclusion was less than the deemed return on tangible assets, therefore no GILTI was included in income for 2019. For the three months ended March 31, 2020, AgeX's foreign entity operated at a loss, therefore no GILTI was included in income for the first quarter of 2020. Current interpretations under ASC 740 state that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense. We have elected to account for GILTI as a current period expense when incurred.
For the three months ended March 31, 2020, AgeX experienced a domestic loss from continuing operations and a foreign loss, therefore no income tax provision was recorded for the three months ended March 31, 2020.
Due to losses incurred for all periods presented, we did not record a domestic provision or benefit for income taxes. A valuation allowance will be provided when it is more likely than not that some portion of the deferred tax assets will not be realized. We established a full valuation allowance for all domestic deferred tax assets for the periods presented due to the uncertainty of realizing future tax benefits from our net operating loss carryforwards and other deferred tax assets.
Liquidity and Capital Resources
Operating Losses and Going Concern Considerations
We have incurred operating losses and negative cash flows since inception and had an accumulated deficit of $89.4 million as of March 31, 2020. We expect to continue to incur operating losses and negative cash flows.
We have made certain adjustments to our operating plans and budgets to reduce our projected cash expenditures in order to extend the period over which we can continue our operations with our available cash resources. These adjustments entailed a staff force reduction, primarily research and development personnel, that will require the deferral of certain work on the development of our product candidates and technologies. We incurred certain expenses arising from the staff reduction, including severance expenses as disclosed in Note 10 to our condensed consolidated interim financial statements included elsewhere in this Report. However, notwithstanding those adjustments, based on our most recent projected cash flows, our cash and cash equivalents and potential additional loans that may become available to us from Juvenescence under the Secured Convertible Facility Agreement (the "New Loan Agreement"), and the proceeds of a PPP Loan discussed in Note 10 to our condensed consolidated interim financial statements,, would not be sufficient to satisfy our anticipated operating and other funding requirements for the next twelve months from the date of filing of this Report. These factors raise substantial doubt regarding our ability to continue as a going concern. See Notes 4 and 9 to our condensed consolidated interim financial statements included elsewhere in this Report for additional information about our loan agreements with Juvenescence. We will need to raise additional capital in the near term to be able to meet our operating expenses.
We have borrowed an initial $500,000 under the New Loan Agreement, but all additional loans to us from Juvenescence under the New Loan Agreement are subject to Juvenescence's discretion, and accordingly there is no assurance that we will be able to borrow additional funds under the New Loan Agreement when we need funding for our operations. The New Loan Agreement prohibits us and our subsidiaries ReCyte Therapeutics and Reverse Bio from borrowing funds or engaging in certain other transactions without the consent of Juvenescence unless we repay all amounts owed to Juvenescence under the New Loan Agreement and the $2 million we owe under the August 2019 Loan Facility Agreement discussed in Note 4 to our condensed consolidated interim financial statements. The New Loan Agreement also requires AgeX and the Guarantor Subsidiaries to grant Juvenescence a security interest and lien on substantially all of our respective assets if AgeX makes more than two draws of funds (generally meaning if AgeX borrows more than $1,000,000). These factors and the impact of dilution through the issuance of shares of our common stock and warrants under other provisions of the New Loan Agreement could make AgeX less attractive to new equity investors and could impair our ability to finance our operations or the operations of our subsidiaries unless Juvenescence agrees, in its discretion, to lend us funds under the New Loan Agreement. We do not have any other committed sources of funds for additional financing.
To the extent that we are able to raise additional capital from sources other than the New Loan Agreement, such as through the sale of AgeX equity or convertible debt securities or the sale of equity or convertible debt securities of any of our subsidiaries, the ownership interest of our present stockholders will be diluted, and the terms of any securities we or our subsidiaries issue may include liquidation or other preferences that adversely affect the rights of our common stockholders. Additional debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, and may involve the issuance of convertible debt or stock purchase warrants that would dilute the equity interests of our stockholders. The New Loan Agreement requires us to issue shares of our common stock and common stock purchase warrants to Juvenescence in total amounts that will vary depending on the amount of funds we borrow, the market price of our common stock, and in the case of issuances of common stock, whether Juvenescence elects to convert any portion of the outstanding loan balance into common stock. See "Risk Factors" and Note 9 to our condensed consolidated interim financial statements. If we raise funds through additional strategic partnerships or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us.
Cash used in operating activities
During the three months ended March 31, 2020, our total research and development expenses were $1.6 million and our general and administrative expenditures were $2.1 million. Net loss attributable to us for the three months ended March 31, 2020 amounted to $3.2 million. Net cash used in operating activities during this period amounted to $2.1 million. The difference between the net loss attributable to us and net cash used in operating activities during the three months ended March 31, 2020 was primarily attributable to the following non-cash items: $0.5 million net change in working capital from operating activities; $0.4 million in depreciation and amortization; and $0.3 million in stock-based compensation expense. These expenses were offset to some extent by $35,000 in net loss attributable to noncontrolling interest.
Cash provided by in investing activities
During the three months ended March 31, 2020, net cash used in investing activities amounted to $4,000, which was paid entirely for the purchase of laboratory equipment.
Cash provided by financing activities
During the three months ended March 31, 2020, net cash provided by financing activities amounted to $0.2 million, which was attributable to the draw of the remaining $0.2 million from the $2.0 million loan facility provided by Juvenescence during August 2019.
Off-Balance Sheet Arrangements
As of March 31, 2020 and December 31, 2019, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
May 14, 2020
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