Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes and other financial information included elsewhere herein. This information should also be read in conjunction with our audited historical consolidated financial statements which are included in our Form 10-K for the fiscal year ended December 31, 2022 (“Form 10-K”). The discussion contains forward-looking statements, such as our plans, expectations and intentions (including those related to clinical trials and business and expense trends), that are based upon current expectations and that involve risks and uncertainties. Our actual results may differ significantly from management’s expectations. The factors that could affect these forward-looking statements are discussed in the Risk Factors included in our Form 10-K. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any expectations expressed herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best assessment by our management.
Business Overview
We have generated aggregate product revenues from our two commercial businesses of $2.1 million and $2.0 million for the three months ended March 31, 2023 and 2022, respectively. We currently have no revenue generated from our principal operations in therapeutic and clinical product development.
Our products are based on multi-decade experience with human cell culture and a proprietary type of pluripotent stem cells, human parthenogenetic stem cells (“hpSCs”). Our hpSCs are comparable to human embryonic stem cells (“hESCs”) in that they have the potential to be differentiated into many different cells in the human body. However, the derivation of hpSCs does not require the use of fertilized eggs or the destruction of viable human embryos and also offers the potential for the creation of immune-matched cells and tissues that are less likely to be rejected following transplantation. Our collection of hpSCs, known as UniStemCell™, currently consists of 15 stem cell lines. We have facilities and manufacturing protocols that comply with the requirements of Good Manufacturing Practice (GMP) standards as promulgated by the U.S. Code of Federal Regulations and enforced by the United States Food and Drug Administration (“FDA”).
Market Opportunity and Growth Strategy
Therapeutic Market – Clinical Applications of hpSCs for Disease Treatments
We are developing different cell types from our stem cells that may result in therapeutic products. We focus on applications where cell and tissue therapy is already proven but where there is an insufficient supply of functional cells or tissue.
We believe that the most promising potential clinical applications of our technology are Parkinson’s disease ("PD”), traumatic brain injury ("TBI”), and stroke. Using our proprietary technologies and know-how, we are creating neural stem cells from hpSCs as a potential treatment of PD, TBI, and stroke.
PD: Our most advanced project is the neural stem cell program for the treatment of Parkinson’s disease. In 2013, we published in Nature Scientific Reports the basis for our patent on a new method of manufacturing neural stem cells, which is used to produce the clinical-grade cells necessary for future clinical studies and commercialization. In 2014, we completed the majority of the preclinical research, establishing the safety profile of NSC in various animal species, including non-human primates. In June 2016, we published the results of a 12-month pre-clinical non-human primate study, which demonstrated the safety, efficacy and mechanism of action of the ISC- hpNSC®. In 2017, we dosed four patients in our Phase I trial of ISC-hpNSC®, human parthenogenetic stem cell-derived neural stem cells for the treatment of Parkinson’s disease. We reported 12-month results from the first cohort and 6-month interim results of the second cohort at the Society for Neuroscience annual meeting (Neuroscience 2018) in November 2018. In April 2019, we announced the completion of subject enrollment, with the 12th subject receiving a transplantation of the highest dose of cells. There have been no safety signals or serious adverse effects seen to date as related to the transplanted ISC-hpNSC® cells.
We announced a successful completion of the dose escalating phase 1 clinical trial in June 2021. In terms of preliminary efficacy, where scores are compared against baseline before transplantation, we observed a potential dose-dependent response with an apparent peak effectiveness at our middle dose. The % OFF-Time, which is the time during the day when levodopa medication is not performing optimally and PD symptoms return, decreased an average 47% from the baseline at 12 months post transplantation in cohort 2. This trend continued through 24 months where the % OFF-Time in the second cohort dropped by 55% from the initial reading. The same was true for % ON-Time without dyskinesia, which is the time during the day when levodopa medication is performing optimally without dyskinesia. The % ON-Time increased an average of 42% above the initial evaluation at 12 months post-transplantation in the second cohort.
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Stroke: In August 2014, we announced the launch of a stroke program, evaluating the use of ISC-hpNSC® transplantation for the treatment of ischemic stroke using a rodent model of the disease. The Company has a considerable amount of safety data on ISC-hpNSC® from the Parkinson’s disease program and, as there is evidence that transplantation of ISC-hpNSC® may improve patient outcomes as an adjunctive therapeutic strategy in stroke, having a second program that can use this safety dataset is therefore a logical extension. In 2015, the Company together with Tulane University demonstrated that NSC can significantly reduce neurological dysfunction after a stroke in animal models.
TBI: In October 2016, we announced the results of the pre-clinical rodent study, evaluating the use of ISC-hpNSC® transplantation for the treatment of TBI. The study was conducted at the University of South Florida Morsani College of Medicine. We demonstrated that animals receiving injections of ISC-hpNSC® displayed the highest levels of improvements in cognitive performance and motor coordination compared to vehicle control treated animals. In February 2019, we published the results of the pre-clinical study in Theranostics, a prestigious peer-reviewed medical journal. The publication titled, "Human parthenogenetic neural stem cell grafts promote multiple regenerative processes in a traumatic brain injury model,” demonstrated that the clinical-grade neural stem cells used in our Parkinson’s disease clinical trial, ISC-hpNSC®, significantly improved TBI-associated motor, neurological, and cognitive deficits without any safety issues.
Anti-Aging Cosmetic Market – Skin Care Products
Our wholly owned subsidiary Lifeline Skin Care, Inc. (“LSC”) develops, manufactures and sells anti-aging skin care products based on two core technologies: encapsulated extract derived from hpSC and specially selected targeted small molecules. LSC’s products include:
•ProPlus Advanced Defense Complex
•ProPlus Advanced Recovery Complex
•ProPlus Eye Firming Complex
•ProPlus Neck Firming Complex
•ProPlus Advanced Aquoues Treatment
•ProPlus Collagen Booster (Advanced Molecular Serum)
•ProPlus Brightening Toner
LSC’s products are regulated as cosmetics. LSC’s products are sold domestically through a branded website, Amazon, and ecommerce partners.
Biomedical Market – Primary Human Cell Research Products
Our wholly owned subsidiary Lifeline Cell Technology, LLC (“LCT”) develops, manufactures and commercializes approximately 200 human cell culture products, including frozen human “primary” cells and reagents (called “media”), which are needed to grow, maintain, and differentiate the cells. LCT’s scientists have used a standardized, methodical, scientific approach to basal medium optimization to systematically produce optimized products designed to culture specific human cell types and to elicit specific cellular behaviors. These techniques can also be used to produce products that do not contain non-human animal proteins, a feature desirable to the research and therapeutic markets. Each LCT cell product is quality tested for the expression of specific markers (to assure the cells are the correct type), proliferation rate, viability, morphology and absence of pathogens. Each cell system also contains associated donor information and all informed consent requirements are strictly followed. LCT’s research products are marketed and sold by its internal sales force, OEM partners and LCT brand distributors in Europe and Asia.
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Results of Operations
Comparison of the Three Months Ended March 31, 2023 and 2022
The following table summarizes our results of operations for the three months ended March 31, 2023 and 2022:
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Three Months Ended March 31, |
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2023 |
|
|
2022 |
|
|
$ Change |
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|
% Change |
|
Product sales |
|
$ |
2,086 |
|
|
$ |
2,020 |
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|
$ |
66 |
|
|
|
3 |
% |
Cost of sales |
|
|
824 |
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|
|
725 |
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|
|
99 |
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|
|
14 |
% |
As a % of revenues |
|
|
40 |
% |
|
|
36 |
% |
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|
|
|
|
|
General and administrative |
|
|
800 |
|
|
|
832 |
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|
|
(32 |
) |
|
|
-4 |
% |
Selling and marketing |
|
|
315 |
|
|
|
301 |
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|
|
14 |
|
|
|
5 |
% |
Research and development |
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|
145 |
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|
|
137 |
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8 |
|
|
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6 |
% |
Other income (expense), net |
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|
(36 |
) |
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|
(34 |
) |
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(2 |
) |
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6 |
% |
Net loss |
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$ |
(34 |
) |
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$ |
(9 |
) |
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$ |
(25 |
) |
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|
278 |
% |
As a % of revenues |
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-2 |
% |
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0 |
% |
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Product sales, net
Product sales for the three months ended March 31, 2023 was $2,086 thousand compared to $2,020 thousand for the three months ended March 31, 2022. The increase of $66 thousand, or 3%, was primarily attributable to an increase of $276 thousand in our Cells product sales, partially offset by a $179 thousand decrease in our Media and other product sales in our Biomedical market segment. This net increase was further offset by a decrease in our skin care product sales of approximately $31 thousand as a result of the discontinuation of our professional line of anti-aging products, resulting in only one product line and less demand.
Cost of sales
Cost of sales for the three months ended March 31, 2023 was $824 thousand, compared to $725 thousand for the three months ended March 31, 2022. The increase of $99 thousand, or 14%, was from our Biomedical line, approximately $69 thousand unfavorable manufacturing variances, partially offset by the sale of 100% reserved inventory of $30 thousand and from our Skin care line, a decrease in anti-aging product sales of approximately $6 thousand.
Profit margins have decreased approximately 4% for the three months ended March 31, 2023, as compared to the three months ended March 31, 2022, which is primarily attributable to an overall increase in cost of sales.
Cost of sales consists primarily of salaries and benefits associated with employee efforts expended directly on the production of the Company’s products, as well as related direct materials, general laboratory supplies and the allocation of overhead. We aim to continue to refine our manufacturing processes and supply chain management to improve the cost of sales as a percentage of revenue for both our LCT and LSC segments.
Research and development income
Research and development expense for the three months ended March 31, 2023 was $145 thousand, compared to $137 thousand for the three months ended March 31, 2022. The increase of $8 thousand, or 6%, was a result of an increase in personnel and stock compensation costs, including consultant costs, of approximately $34 thousand. This was partially offset by a decrease of approximately $19 thousand in other patent related costs quarter-over-quarter, as well as a net decrease in supplies, facilities and licensing expense of approximately $7 thousand.
Our research and development efforts are primarily focused on the development of treatments for Parkinson’s disease, traumatic brain injury, and stroke. These projects are long-term investments that involve developing both new stem cell lines and new differentiation techniques that can provide higher purity populations of functional cells. Research and development expenses are expensed as incurred and are accounted for on a project-by-project basis. However, much of our research has potential applicability to each of our projects.
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Selling and marketing expenses
Selling and marketing expenses for the three months ended March 31, 2023 was $315 thousand, compared to $301 thousand for the three months ended March 31, 2022. The increase of $14 thousand, or 5%, was primarily attributable to an increase in advertising expense partially offset by a decrease in shipping costs resulting from the reclassification to cost of sales in the current year versus the prior year.
Our sales and marketing expenses consist primarily of employee-related expenses including salaries, bonuses, benefits, and share-based compensation for our Biomedical and Anti-aging cosmetic businesses. Other significant costs include facility costs not otherwise included in or allocated to other departments, as well as marketing material costs, permits and licenses for ecommerce, and other advertising expenses.
General and administrative expenses
General and administrative expenses for the three months ended March 31, 2023 was $800 thousand, compared to $832 thousand for the three months ended March 31, 2022. The decrease of $32 thousand, or 4%, was primarily attributable to decreases in personnel-related costs, including relocation costs, of approximately $34 thousand, and insurance and licensing fees of approximately $22 thousand, which were partially offset by increases in consulting fees, legal fees and other logistics and general fees of approximately $24 thousand.
Our general and administrative expenses consist primarily of employee-related expenses including salaries, bonuses, benefits, and share-based compensation. Other significant costs include facility costs not otherwise included in or allocated to other departments, legal fees not relating to patents and corporate matters, and fees for accounting and consulting services.
Other income (expense), net
Other expense, net for the three months ended March 31, 2023 was $36 thousand, compared to other expense, net of $34 thousand for the three months ended March 31, 2022. The increase was attributable to interest on our related party note payable.
Liquidity and Capital Resources
The Company enters into contracts in the normal course of business with various third-party consultants and contract research organizations (“CRO”) for preclinical research, clinical trials and manufacturing activities. These contracts generally provide for termination upon notice. Actual expenses associated with these arrangements may be higher or lower due to various reasons, including but not limited to, progress of our development products, enrollment in clinical trials, and product and personnel delays due to COVID. Other short-term and long terms commitments that would affect liquidity include lease obligations as well as related party debt repayments.
As of March 31, 2023, we had an accumulated deficit of approximately $110.4 million and have historically incurred net losses and negative operating cash flows. Substantially all of our operating losses have resulted from the funding of our research and development programs and general and administrative expenses associated with our operations. We incurred net losses of $34 thousand and $9 thousand for the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023, we had cash of approximately $943 thousand, compared to $742 thousand as of December 31, 2022. Our primary use of cash is to continue to fund our research and development programs while maintaining and growing our revenue generating businesses.
Cash Flows
Comparison of the Three Months Ended March 31, 2023 and 2022
The following table provides information regarding our cash flows for the three months ended March 31, 2023 and 2022 (in thousands):
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Three Months Ended March 31, |
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2023 |
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2022 |
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Net cash provided by (used in) operating activities |
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$ |
216 |
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$ |
(23 |
) |
Net cash used in investing activities |
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(15 |
) |
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— |
|
Net cash provided by financing activities |
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— |
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250 |
|
Net increase (decrease) in cash |
|
$ |
201 |
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|
$ |
227 |
|
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Operating Cash Flows
For the three months ended March 31, 2023, net cash provided by operating activities was $216 thousand, resulting primarily from our net loss of $34 thousand and net changes in operating assets and liabilities of $19 thousand, consisting of decreases in operating lease liabilities of $53 thousand, accounts receivable, net of $59 thousand and inventory, net of $81 thousand partially offset by increases in accounts payable of $29 thousand, accrued liabilities of $124 thousand and prepaid expenses and other current assets of $221 thousand. The decrease in cash was partially offset by net noncash adjustments of $231 thousand, pertaining to recurring non-cash expenses, such as stock-based compensation, depreciation and amortization expense, non-cash operating lease expense, and interest expense on our related party note payable.
For the three months ended March 31, 2022, net cash used in operating activities was $23 thousand, resulting primarily from our net loss of $9 thousand and net changes in operating assets and liabilities of $226 thousand, partially offset by net recurring non-cash adjustments of $212 thousand.
Investing Cash Flows
Net cash used in investing activities for the three months ended March 31, 2023 was $15 thousand, compared to none for the three months ended March 31, 2022. The increase was attributable to the purchase of property and equipment during the current period.
Financing Cash Flows
For the three months ended March 31, 2023, no net cash was provided by financing activities compared to $250 thousand net cash provided for the three months ended March 31, 2022. Net cash provided for the three months ended March 31, 2022 was wholly attributable to proceeds from our related party note payable of $250 thousand.
Funding Requirements
Management continues to evaluate various financing sources and options to raise working capital to help fund our current research and development programs and operations. We will need to obtain significant additional capital from equity and/or debt financings, license arrangements, grants and/or collaborative research arrangements to sustain our operations and develop products. Unless we obtain additional financing, we do not have sufficient cash on hand to sustain our operations at least through one year after the issuance date. The timing and degree of any future capital requirements will depend on many factors, including:
•the accuracy of the assumptions underlying our estimates for capital needs;
•the extent that revenues from sales of LSC and LCT products cover the related costs and provide capital;
•scientific progress in our research and development programs;
•the magnitude and scope of our research and development programs and our ability to establish, enforce and maintain strategic arrangements for research, development, clinical testing, manufacturing and marketing;
•our progress with preclinical development and clinical trials;
•the extent to which third party interest in Company’s research and commercial products can be realized through effective partnerships;
•the time and costs involved in obtaining regulatory approvals;
•the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims; and
•the number and type of product candidates that we pursue.
Our failure to raise capital or enter into applicable arrangements when needed would have a negative impact on our financial condition. Additional debt financing may be expensive and require us to pledge all or a substantial portion of its assets. Further, if additional funds are obtained through arrangements with collaborative partners, these arrangements may require us to relinquish rights to some of its technologies, product candidates or products that we would otherwise seek to develop and commercialize on its own. If sufficient capital is not available, we may be required to delay, reduce the scope of or eliminate one or more of its product initiatives.
We currently have no revenue generated from our principal operations in therapeutic and clinical product development through research and development efforts. There can be no assurance that we will be successful in maintaining our normal operating cash flow
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and obtaining additional funds and that the timing of our capital raising or future financing will result in cash flow sufficient to sustain our operations at least through one year after the issuance date.
Based on the factors above, there is substantial doubt about our ability to continue as a going concern. The consolidated financial statements were prepared assuming that we will continue to operate as a going concern. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. Management’s plans in regard to these matters are focused on managing our cash flow, the proper timing of our capital expenditures, and raising additional capital or financing in the future.
Critical Accounting Estimates
Our management’s discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America and the rules and regulations of the Securities and Exchange Commission. The preparation of these condensed consolidated financial statements requires us to make judgements and estimates that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statement, and the reported amounts of revenues, costs and expenses during the reporting periods.
Our estimates are based on our historical experience, known trends and events, and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities and amount of expense recognized that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We evaluate our estimates and assumptions on an ongoing basis. The effects of material revisions in estimates, if any, will be reflected in the consolidated financial statements prospectively from the date of the change in estimates.
There have been no material changes to our critical accounting policies and estimates during the three months ended March 31, 2023 from those disclosed in “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K.
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 1 to our condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.
Contractual Obligations and Commitments
There have been no material changes to our contractual obligations and commitments outside the ordinary course of business during the three months ended March 31, 2023 from those disclosed in “Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K.