Notes to the Condensed Financial Statements
(Unaudited)
Three and Nine Month Periods Ended September 30,
2021 and 2020
1. Nature of Business, Basis of Presentation, and Liquidity
Nature of business:
On February 12, 2021, Longeveron LLC converted
its corporate form (the “Corporate Conversion”) from a Delaware limited liability company (Longeveron, LLC) to a Delaware
corporation, Longeveron Inc. (the “Company,” “Longeveron” or “we,” “us,” or “our”).
Longeveron LLC was formed as a Delaware limited liability company on October 9, 2014 and authorized to transact business in Florida on
December 15, 2014. The Company is a clinical stage biotechnology company developing cellular therapies for specific aging-related
and life-threatening conditions. The Company operates out of its leased facilities in Miami, Florida.
The Company is subject to risks and uncertainties
common to early-stage companies in the biotechnology industry, including, but not limited to, development by competitors of new technological
innovations, dependence on licenses, protection of proprietary technology, dependence on key personnel, compliance with government regulations
and the need to obtain additional financing to fund operations. Product candidates currently under development will require significant
additional research and development efforts, including extensive pre-clinical studies and clinical trials and regulatory approval, prior
to commercialization. These efforts require significant amounts of additional capital, adequate personnel infrastructure and extensive
compliance and reporting capabilities.
The Company’s product candidates are currently
in development. There can be no assurance that the Company’s research and development will be successfully completed, that adequate
protection for the Company’s intellectual property will be obtained, that any products developed will obtain necessary government
regulatory approval or that any approved products will be commercially viable. Even if the Company’s product development efforts
are successful, it is uncertain when, if ever, the Company will generate significant revenue from product sales. The Company operates
in an environment of rapid technological change and substantial competition from, among others, existing pharmaceutical and biotechnology
companies. In addition, the Company is dependent upon the services of its employees, partners and consultants.
Initial Public Offering (“IPO”):
On February 12, 2021 our Class A common stock
began to trade on NASDAQ under the stock symbol “LGVN”. Pursuant to the IPO, the Company sold 2,660,000 shares of Class A
common stock at a public offering price of $10.00 per share for aggregate gross proceeds of $26.6 million prior to deducting underwriting
discounts, commissions, and other offering expenses. In addition, the Company granted the underwriters a 30-day option to purchase up
to an additional 399,000 shares at the public offering price less the underwriting discounts and commissions.
On March 15, 2021, the Company’s underwriters
partially exercised its over-allotment option, resulting in the Company selling an additional 250,000 shares of Class A common stock at
a public offering price of $10.00 per share for aggregate gross proceeds of $2.5 million prior to deducting underwriting discounts, commissions,
and other offering expenses.
Basis of presentation:
The unaudited Condensed Financial Statements have
been prepared in accordance with the requirements of Article 8 of Regulation S-X promulgated under the Exchange Act and, therefore, do
not include all information and footnotes necessary for a fair presentation of financial position, results of operations, and cash flows
in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). These unaudited
Condensed Financial Statements should be read in conjunction with our Financial Statements and related notes, included in our Annual Report
on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC. Unless otherwise stated, references to particular years
or quarters refer to our fiscal years ended December 31 and the associated quarters of those fiscal years.
The Condensed Financial Statements are unaudited,
but include all adjustments, including normal recurring adjustments, which, in the opinion of management, are necessary to present fairly
our financial position, results of operations and cash flows for the interim periods presented. The Condensed Balance Sheet as of December
31, 2020 has been derived from the audited financial statements at that date but does not include all of the information and notes required
by U.S. GAAP for complete financial statements. Results of operations for interim periods are not necessarily indicative of the results
that may be expected for the year as a whole.
Liquidity:
Since inception, the Company has primarily been
engaged in organizational activities, including raising capital, and research and development activities. The Company does not yet have
a product that has been approved by the U.S. Food and Drug Administration (“FDA”), and has only generated revenues from grants,
clinical trials and contract manufacturing. The Company has not yet achieved profitable operations or generated positive cash flows from
operations. The Company intends to continue its efforts to raise additional equity financing, develop its intellectual property, and secure
regulatory approvals to commercialize its products. There is no assurance that profitable operations, if achieved, could be sustained
on a continuing basis. Further, the Company’s future operations are dependent on the success of the Company’s efforts to raise
additional capital, its research and commercialization efforts, regulatory approval, and, ultimately, the market acceptance of the Company’s
products. These financial statements do not include adjustments that might result from the outcome of these uncertainties.
The Company has incurred recurring losses from
operations since its inception, including a net loss of $13.0 million and $2.4 million for the nine months ended September 30, 2021 and
2020, respectively. In addition, as of September 30, 2021, the Company had an accumulated deficit of $39.9 million. The Company expects
to continue to generate operating losses for the foreseeable future.
As of September 30, 2021, the Company had cash,
and cash equivalents of $9.7 million and short-term investments of $9.2 million. The Company believes that its cash and cash equivalents
and investments as of September 30, 2021 will enable it to fund its operating expenses and capital expenditure requirements through at
least the next 12 months from the date of issuance of these financial statements.
2. Summary
of Significant Accounting Policies
Use of estimates:
The presentation of financial statements in conformity
with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Accounting Standard Updates
In December 2019, the Financial Accounting Standards
Board issued Accounting Standards Update 2019-12, “Income Taxes (Topic 740)”. The amendments in this ASU simplify the accounting
for income taxes by removing certain exceptions to the general principles in Topic 740 and by clarifying and amending other areas of Topic
740. The amendments in this ASU are effective for annual and interim periods beginning after December 15, 2020. We adopted this ASU on
January 1, 2021 with no material impact on our consolidated financial statements.
A variety of proposed or otherwise potential accounting
standards are currently under consideration by standard-setting organizations and certain regulatory agencies. Because of the tentative
and preliminary nature of such proposed standards, management has not yet determined the effect, if any, that the implementation of such
proposed standards would have on the Company’s financial statements.
Cash and cash equivalents:
The Company considers cash to consist of cash
on hand and temporary investments having an original maturity of 90 days or less that are readily convertible into cash.
Short-term investments:
Short-term investments at September 30, 2021 consisted
of marketable fixed income securities, primarily corporate bonds, which are categorized as available-for-sale securities and are thus
marked to market and stated at fair value in accordance with ASC 820 Fair Value Measurement. These investments
are considered Level 2 investments within the ASC 820 fair value hierarchy. The fair value of corporate bonds is determined using
standard market valuation methodologies, including discounted cash flows, matrix pricing and / or other similar techniques. The inputs
to these valuation techniques include but are not limited to market interest rates, credit rating of the issuer or counterparty, industry
sector of the issuer, coupon rate, call provisions, maturity, estimated duration and assumptions regarding liquidity and estimated future
cash flows. In addition to bond characteristics, the valuation methodologies incorporate market data, such as actual trades completed,
bids and actual dealer quotes, where such information is available. Accordingly, the estimated fair values are based on available market
information and judgments about financial instruments categorized within Level 2 of the fair value hierarchy. Interest and dividends
are recorded when earned. Realized gains and losses on investments are determined by specific identification and are recognized as
incurred in the statement of operations. Changes in net unrealized gains and losses are reported in the statement of operations in
the current period and represent the change in the fair value of investment holdings during the reporting period. Changes in net
unrealized gains and losses were not significant for the three and nine months ended September 30, 2021, and there were no such changes
for the three and nine months ended September 30, 2020.
Inventory:
The Company will begin carrying inventory of its
biological products on its balance sheets following commercial launch of such products. Inventory will consist of raw materials, biological
products in process, and finished goods available for sale. The Company will determine its inventory values using the average cost method.
Inventory will be valued at the lower of cost or net realizable value and will exclude units that the Company anticipates distributing
for clinical evaluation. As of each of September 30, 2021 and December 31, 2020, all of the Company’s biological products were anticipated
to be distributed for clinical evaluation.
The Company does not currently carry any inventory
for its biological products, as it has yet to launch a product for commercial distribution. Historically the Company’s operations
have focused on clinical trials and discovery efforts, and accordingly, costs of manufactured clinical doses of biological product candidates
were expensed as incurred, consistent with the accounting for all other research and development costs. Once the Company begins commercial
distribution, costs of all newly manufactured biological products will be allocated either for use in commercial distribution, which will
be carried as inventory and not expensed, or for research and development efforts, which will continue to be expensed as incurred.
Accounts and grants receivable:
Accounts and grants receivable include amounts
due from customers, granting institutions and others. The amounts as of September 30, 2021 and December 31, 2020 are deemed to be collectible
and no amount has been recognized for doubtful accounts. MSCRF-TEDCO generally advance grant funds and therefore a receivable is not usually
recognized. In addition, for the Clinical trial revenue, most participants pay in advance of treatment. Advanced grant funds and prepayments
for the Clinical trial revenue are recorded to deferred revenue.
Accounts and grants receivable by source, as of
(in thousands):
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Alzheimer’s Association – Grant
|
|
$
|
-
|
|
|
$
|
339
|
|
National Institutes of Health – Grant
|
|
|
171
|
|
|
|
66
|
|
Clinical Trial receivable
|
|
|
-
|
|
|
|
15
|
|
Total
|
|
$
|
171
|
|
|
$
|
420
|
|
Deferred offering costs:
The Company recorded certain legal, professional
and other third-party fees that were directly associated with in-process equity financings as deferred offering costs until the applicable
equity financing was consummated. After consummation of an equity financing, these costs are recorded in stockholders’ equity as
a reduction of proceeds generated as a result of the offering. At September 30, 2021 the deferred offering costs accrued as of December
31, 2020 of $0.6 million were recorded to stockholders’ equity.
Property and equipment:
Property and equipment, including improvements
that extend useful lives of related assets, are valued at cost, while maintenance and repairs are charged to operations as incurred. Depreciation
is calculated using the straight-line method based on the estimated useful lives of the assets. Leasehold improvements are amortized over
the shorter of the estimated useful life of the asset or the original term of the lease. Depreciation expense is recorded in the research
and development line of the Statement of Operations as the assets are primarily related to the Company’s clinical programs.
Intangible assets:
Intangible assets include payments on license
agreements with the Company’s co-founder and chief scientific officer (“CSO”) and the University of Miami (“UM”)
(see Note 9) and legal costs incurred related to patents and trademarks. License agreements have been recorded at the value of cash consideration,
common stock and membership units transferred to the respective parties when acquired.
Payments on license agreements are amortized using
the straight-line method over the estimated term of the agreements, which range from 5-20 years. Patents are amortized over their estimated
useful life, once issued. The Company considers trademarks to have an indefinite useful life and evaluates them for impairment on an annual
basis. Amortization expense is recorded in the research and development line of the Statement of Operations as the assets are primarily
related to the Company’s clinical programs.
Impairment of Long-Lived Assets:
The Company evaluates long-lived assets for impairment,
including property and equipment and intangible assets, when events or changes in circumstances indicate that the carrying value of such
assets may not be recoverable. Upon the occurrence of a triggering event, the asset is reviewed to assess whether the estimated undiscounted
cash flows expected from the use of the asset plus the residual value from the ultimate disposal exceeds the carrying value of the asset.
If the carrying value exceeds the estimated recoverable amounts, the asset is written down to the estimated fair value. Any resulting
impairment loss is reflected on the statements of operations. Upon evaluation, management determined that there was no impairment of long-lived
assets as of September 30, 2021 and December 31, 2020.
Deferred revenue:
The unearned portion of advanced grant funds and
prepayments for Clinical trial revenue, which will be recognized as revenue when the Company meets the respective performance obligations,
has been presented as deferred revenue in the balance sheets. For the nine months ended September 30, 2021 and 2020, the Company recognized
nil and $0.3 million, respectively, of funds that were previously classified as deferred revenue (of which nil and $0.2 million was attributable
to each of the three-month periods ended September 30, 2021 and 2020).
Revenue recognition:
The Company recognizes revenue when performance
obligations related to respective revenue streams are met. For Grant revenue, the Company considers the performance obligation met when
the grant related expenses are incurred, or supplies and materials are received. The Company is paid in tranches pursuant to terms of
the related grant agreements, and then applies payments based on regular expense reimbursement submissions to grantors. There are no remaining
performance obligations or variable consideration once grant expense reporting to the grantor is complete. For Clinical trial revenue,
the Company considers the performance obligation met when the participant has received the treatment. The Company usually receives prepayment
for these services or receives payment at the time the treatment is provided, and there are no remaining performance obligations or variable
consideration once the participant received the treatment. For Contract manufacturing revenue, the Company considers the performance obligation
met when the contractual obligation and / or statement of work has been satisfied. Payment terms may vary depending on specific contract
terms. There are no significant judgments affecting the determination of the amount and timing of revenue recognition.
Revenue by source (in thousands):
|
|
Three months ended
September 30,
|
|
|
Nine
months ended
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
National Institute of Health - grant
|
|
$
|
41
|
|
|
$
|
1,195
|
|
|
$
|
171
|
|
|
$
|
2,538
|
|
Clinical trial revenue
|
|
|
164
|
|
|
|
30
|
|
|
|
543
|
|
|
|
792
|
|
Alzheimer’s Association grant
|
|
|
10
|
|
|
|
598
|
|
|
|
271
|
|
|
|
1,038
|
|
MSCRF – TEDCO1 - grant
|
|
|
17
|
|
|
|
(5
|
)
|
|
|
112
|
|
|
|
26
|
|
Contract manufacturing revenue
|
|
|
-
|
|
|
|
47
|
|
|
|
-
|
|
|
|
55
|
|
Total
|
|
$
|
232
|
|
|
$
|
1,865
|
|
|
$
|
1,097
|
|
|
$
|
4,449
|
|
|
1
|
Maryland Stem Cell Research Fund (MSCRF) - Maryland Technology
Development Corporation (TEDCO)
|
The Company records cost of revenues based on
expenses directly related to revenue. For Grants, the Company records allocated expenses for Research and development costs to a grant
as a cost of revenues. For the Clinical trial revenue directly related expenses for that program are allocated and expensed as incurred.
These expenses are similar to those described under “Research and development expense” below.
Research and development expense:
Research and development costs are charged to
expense when incurred in accordance with ASC 730. ASC 730 addresses the proper accounting and reporting for research and development costs.
It identifies: 1) those activities that should be identified as research and development; 2) the elements of costs that should be identified
with research and development activities, and the accounting for these costs; and 3) the financial statement disclosures related to them.
Research and development costs include costs such as clinical trial expenses, contracted research and license agreement fees with no alternative
future use, supplies and materials, salaries, share-based compensation, employee benefits, property and equipment depreciation and allocation
of various corporate costs. The Company accrues for costs incurred by external service providers, including contract research organizations
and clinical investigators, based on its estimates of service performed and costs incurred. These estimates include the level of services
performed by the third parties, patient enrollment in clinical trials, administrative costs incurred by the third parties, and other indicators
of the services completed. Based on the timing of amounts invoiced by service providers, the Company may also record payments made to
those providers as prepaid expenses that will be recognized as expense in future periods as the related services are rendered.
Concentrations of credit risk:
Financial instruments which potentially subject
the Company to credit risk consist principally of cash and cash equivalents, short-term investments and accounts and grants receivable.
Cash and cash equivalents are held in United States financial institutions. At times, the Company may maintain balances in excess of the
federally insured amounts.
Income taxes:
Prior to its Corporate Conversion, the Company
was treated as a partnership for U.S. federal and state income tax purposes. Consequently, the Company passed its earnings and losses
through to its members based on the terms of the Company’s Operating Agreement. Accordingly, no provision for income taxes is recorded
in the financial statements for periods prior to the conversion.
Following the Corporate Conversion, the Company's
tax provision consists of taxes currently payable or receivable, plus any change during the period in deferred tax assets and liabilities.
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets
and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. In addition, a
valuation allowance is established to reduce any deferred tax asset for which it is determined that it is more likely than not that some
portion of the deferred tax asset will not be realized. The Company's tax provision was nil for the nine months ended September 30, 2021
due to net operating losses. The Company has not recorded any tax benefit for the net operating losses incurred due to the uncertainty
of realizing a benefit in the future.
The Company recognizes the tax benefits from uncertain
tax positions that the Company has taken or expects to take on a tax return. In the unlikely event an uncertain tax position exists in
which the Company could incur income taxes, the Company would evaluate whether there is a probability that the uncertain tax position
taken would be sustained upon examination by a taxing authority. Reserves for uncertain tax positions would then be recorded if the Company
determined it is probable that either a position would not be sustained upon examination or a payment would have to be made to a taxing
authority and the amount was reasonably estimable. As of September 30, 2021 and December 31, 2020, the Company does not believe it has
any uncertain tax positions that would result in the Company having a liability to the taxing authority. It is the Company’s policy
to expense any interest and penalties associated with its tax obligations when they are probable and estimable.
Equity-based compensation:
The Company accounts for equity-based compensation
expense by the measurement and recognition of compensation expense for stock-based awards based on estimated fair values on the date of
grant. The fair value of the options is estimated at the date of the grant using the Black-Scholes option-pricing model.
The Black-Scholes option-pricing model requires
the input of highly subjective assumptions, the most significant of which are the expected share price volatility, the expected life of
the option award, the risk-free rate of return, and dividends during the expected term. Because the option-pricing model is sensitive
to changes in the input assumptions, different determinations of the required inputs may result in different fair value estimates of the
options.
Neither the Company’s stock options nor
its restricted stock units (“RSUs”) trade on an active market. Volatility is a measure of the amount by which a financial
variable, such as a stock price, has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period.
Given the Company’s limited historical data, the Company utilizes the average historical volatility of similar publicly traded companies
that are in the same industry. The risk-free interest rate is the average U.S. treasury rate (having a term that most closely approximates
the expected life of the option) for the period in which the option was granted. The expected life is the period of time that the options
granted are expected to remain outstanding. Options granted have a maximum term of ten years. The Company had insufficient historical
data to utilize in determining its expected life assumptions and, therefore, uses the simplified method for determining expected life.
Comprehensive Loss
Comprehensive loss was equal to net loss for the
nine months ended September 30, 2021 and 2020.
3. Short-term
investments
Short-term investments consisted of the following (in thousands):
|
|
September 30, 2021
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gains
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair Value
|
|
Fixed income bond funds
|
|
$
|
9,224
|
|
|
|
8
|
|
|
|
-
|
|
|
|
9,232
|
|
Total short-term investments
|
|
$
|
9,224
|
|
|
|
8
|
|
|
|
-
|
|
|
$
|
9,232
|
|
As of December 31, 2020, the Company did not have
any short-term investments.
4. Property
and equipment, net
Major components of property and equipment are as follows (in thousands):
|
|
Useful Lives
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
Leasehold improvements
|
|
10 years
|
|
$
|
4,310
|
|
|
$
|
4,310
|
|
Furniture/Lab equipment
|
|
7 years
|
|
|
2,071
|
|
|
|
2,059
|
|
Computer equipment
|
|
5 years
|
|
|
20
|
|
|
|
14
|
|
Software/Website
|
|
3 years
|
|
|
38
|
|
|
|
38
|
|
Total property and equipment
|
|
|
|
|
6,439
|
|
|
|
6,421
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
3,369
|
|
|
|
2,824
|
|
Property
and equipment, net
|
|
|
|
$
|
3,070
|
|
|
$
|
3,597
|
|
Depreciation and amortization expense amounted
to approximately $0.2 and $0.5 million for each of the three and nine months ended September 30, 2021 and 2020, respectively.
5. Intangible
assets, net
Major components of intangible assets as of September
30, 2021 are as follows (in thousands):
|
|
Useful Lives
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Total
|
|
License agreements
|
|
5-20 years
|
|
$
|
2,043
|
|
|
$
|
(417
|
)
|
|
$
|
1,626
|
|
Patent Costs
|
|
|
|
|
584
|
|
|
|
-
|
|
|
|
584
|
|
Trademark
costs
|
|
|
|
|
148
|
|
|
|
-
|
|
|
|
148
|
|
Total
|
|
|
|
$
|
2,775
|
|
|
$
|
(417
|
)
|
|
$
|
2,358
|
|
Major components of intangible assets as of December
31, 2020 are as follows:
|
|
Useful Lives
|
|
Cost
|
|
|
Accumulated
Amortization
|
|
|
Total
|
|
License agreements
|
|
20 years
|
|
$
|
1,233
|
|
|
$
|
(279
|
)
|
|
$
|
954
|
|
Patent Costs
|
|
|
|
|
466
|
|
|
|
-
|
|
|
|
466
|
|
Trademark
costs
|
|
|
|
|
127
|
|
|
|
-
|
|
|
|
127
|
|
Total
|
|
|
|
$
|
1,826
|
|
|
$
|
(279
|
)
|
|
$
|
1,547
|
|
Amortization expense related to intangible assets
totaled $0.1 million for each of the three- and nine-month periods ended September 30, 2021 and 2020.
Future amortization
expense for intangible assets as of September 30, 2021 is approximately as follows (in thousands):
Year Ending December 31,
|
|
Amount
|
|
2021
|
|
$
|
58
|
|
2022
|
|
|
224
|
|
2023
|
|
|
224
|
|
2024
|
|
|
224
|
|
2025
|
|
|
224
|
|
Thereafter
|
|
|
672
|
|
Total
|
|
$
|
1,626
|
|
6. Leases
In accordance with Accounting Standards Update
2016-02, “Leases (Topic 842)”, the Company records a Right-of-use (ROU) asset and a lease liability related to its operating
leases (there are no finance leases). The Company’s corporate office lease expires in March 2027. As of September 30, 2021, the
ROU asset and lease liability were approximately $1.9 million and $3.3 million, respectively. As of December 31, 2020, the ROU asset and
lease liability were approximately $2.1 million and $3.7 million, respectively.
Future minimum
payments under the operating leases as of September 30, 2021 are as follows (in thousands):
Year Ending December 31,
|
|
Amount
|
|
2021 (remaining three months)
|
|
$
|
165
|
|
2022
|
|
|
671
|
|
2023
|
|
|
687
|
|
2024
|
|
|
702
|
|
2025
|
|
|
718
|
|
Thereafter
|
|
|
920
|
|
Total
|
|
|
3,863
|
|
Less: Interest
|
|
|
591
|
|
Present Value of Lease Liability
|
|
$
|
3,272
|
|
During the three- and nine-month periods ended
September 30, in each of 2021 and 2020, the Company incurred approximately $0.2 million and $0.5 million of total lease costs, respectively,
that are included in the general and administrative expenses in the statements of operations.
On July 1, 2020, the Company entered into a sublease
agreement for a portion of its leased space for a one-year period ending September 30, 2021, with three optional one-year renewal periods,
and $10,000 in monthly payments to the Company. This sublease agreement was amended on July 29, 2021, effective August 1, 2021. The amendment
to the sublease increased the number of cleanrooms occupied by the lessee, changed the expiration date to July 31, 2022, increased the
base rent to $22,500, beginning on September 1, 2021, and increased the security deposit to $22,500. For the nine months ended September
30, 2021, $102,500 was recognized as sublease income, and is included in other income in the statements of operations.
7. Members’ Equity and Stockholders’
Equity
IPO
The Corporate Conversion undertaken immediately
prior to the Company’s IPO caused all existing Series A and B units to convert into Class B common stock and all existing Series
C units to convert into Class A common stock. The purpose of the Corporate Conversion was to reorganize the Company structure so that
the entity that offered the Company’s Class A common stock to the public was a Delaware corporation rather than a Delaware limited
liability company, and so that the Company’s existing investors own the Company’s Class A common stock or Class B common stock
rather than equity interests in a limited liability company.
Pursuant to the IPO, the Company sold 2,660,000
shares of Class A common stock at a public offering price of $10.00 per share for aggregate gross proceeds of $26.6 million prior to deducting
underwriting discounts, commissions, and other offering expenses. Thereafter, on March 15, 2021, the Company sold an additional 250,000
shares of Class A common stock at a public offering price of $10.00 per share for additional aggregate gross proceeds of $2,500,000 prior
to deducting underwriting discounts, commissions, and other offering expenses, pursuant to a partial exercise of the over-allotment option
held by the underwriters.
Class A Common Stock
During the nine months ended September 30, 2021
and prior to the Corporate Conversion, the Company issued 1,130 Series C Common Membership Units (“Series C Units”), as payment
for existing consulting agreements, with an aggregate value of $0.1 million. As part of the Corporate Conversion, 63,893 outstanding Series
C units (which includes the units referenced in the prior sentence) converted into 344,077 shares of Class A common stock.
Also, during the three and nine months ended September
30, 2021, the Company issued 6,000 and 163,719 unregistered shares of Class A common stock shares, with an aggregate value of less than
$0.1 million and $1.2 million, respectively, as payment under consulting and license agreements.
During the nine months ended September 30, 2020,
the Company issued 18,335 Series C Units for $1.1 million in cash (none during the three months ended September 30, 2020). The Company
also issued 734 Series C Units with an aggregate value of $0.1 million as payment under consulting agreements.
Class B Common Stock
In connection with the Corporate Conversion, 2,000,000
outstanding Series A and B units were converted into 15,702,834 shares of unregistered Class B common stock.
Holders of Class A common stock generally have
rights identical to holders of Class B common stock, except that holders of Class A common stock are entitled to one vote
per share and holders of Class B common stock are entitled to five (5) votes per share. The holders of Class B common stock may convert
each share of Class B common stock into one share of Class A common stock at any time at the holder’s option. Class B common shares
are not publicly tradable.
Warrants
As part of the IPO, the underwriter received warrants
to purchase 106,400 shares of Class A common stock. The warrants are exercisable at any time and from time to time, in whole or in part,
during the four and a half-year period commencing August 12, 2021, at a price of $12.00 per Class A common stock share. Total grant date
fair value of warrants as of September 30, 2021, estimated using the Black-Scholes pricing model, was approximately $0.5 million.
8. Equity Incentive Plan
RSUs
As part of the Company’s IPO, the Company
adopted and approved the 2021 Incentive Award Plan (“2021 Incentive Plan”). Under the 2021 Incentive Plan, the Company may
grant cash and equity incentive awards to eligible service providers in order to attract, motivate and retain the talent for which the
Company competes. The material terms of the 2021 Incentive Plan are summarized below.
Prior to the IPO, on January 29, 2021, the Board
approved the granting of 159,817 Series C RSUs under the Company’s existing 2017 Longeveron LLC Incentive Plan (the “2017
Incentive Plan”), which, as part of the Corporate Conversion, converted into 855,247 RSUs exercisable for Class A common stock.
Based upon a third party valuation, the calculated fair value of each January 2021 RSU was $9.00.
One employee resigned from the Company in February
2021, forfeiting 16,113 RSUs. In May and June 2021, annual grants of 5,000 RSUs each were made to each of the Company’s Directors,
based on a fair market value at the time of grant of $0.1 million.
Generally, the RSUs vest upon attainment of a
time-vesting event, by which the RSUs vest in 25% increments per year, on each of the first, second, third and fourth anniversaries of
the date of grant, assuming continued service. Such yearly vesting will vest pro-rata per quarter at the end of each quarter. The RSUs
granted in January of 2021 included accelerated time-based vesting (as having been earned for prior years of service, and hence were treated
as earned “catch-up” awards), and an additional vesting requirement whereby the holder must remain employed by the Company
as of the IPO settlement date, which was the third quarterly settlement date following the Company’s IPO (October 1, 2021).
The fair value of each RSU grant made during 2021
will be recognized as stock-based compensation ratably over the related vesting periods, which approximates the service period, except
for May 2021 grants to the Company’s Directors, which vest over two years with 50% of the RSUs vesting on grant date and the remaining
RSUs vesting 25% on each of the first and second anniversaries of the grant date.
On July 20, 2021, the Company granted a
bonus for the completion of the IPO to Mr. Green, Mr. Lehr and Dr. Hare of $100,000, $75,000 and $75,000. The bonus would be paid
out in cash and RSUs. With Mr. Green, Mr. Lehr and Dr. Hare received 8,223, 6,167 and 12,335 RSUs each. The RSU were
issued based on a fair market value at the time of grant, July 20, 2021, of $6.08.
As of September 30, 2021, the Company had 897,564
RSUs granted and outstanding.
RSU activity for the nine months ended September
30, 2021 was as follows:
|
|
Number of
RSUs
|
|
Outstanding at December 31, 2020
|
|
|
-
|
|
RSU granted
|
|
|
921,972
|
|
RSU exercised
|
|
|
-
|
|
RSU expired/forfeited
|
|
|
(24,408
|
)
|
Outstanding at September 30, 2021
|
|
|
897,564
|
|
Stock Options
Stock options may be granted under the 2021 Incentive
Plan. The exercise price of options is equal to the fair market value of the Company’s Class A common stock as of the grant date.
Options historically granted have generally become exercisable over four years and expire ten years from the date of grant. The 2021 Incentive
Plan provides for equity grants to be granted up to 5% of the outstanding common stock shares.
The fair value of the options issued are estimated
using the Black-Scholes option-pricing model and have the following assumptions: a dividend yield of 0%; an expected life of 10 years;
volatility of 95%; and risk-free interest rate based on the grant date ranging from of 1.23% to 1.62%. Each option grant made during 2021
will be expensed ratably over the option vesting periods, which approximates the service period.
As of September 30, 2021, the Company has recorded
issued and outstanding options to purchase a total of 321,000 shares of Class A common stock pursuant to the 2021 Incentive Plan, at a
weighted average exercise price of $5.95 per share.
For the nine months ended September 30, 2021:
|
|
Number of
Stock Options
|
|
Stock options vested (based on ratable vesting)
|
|
|
40,894
|
|
Stock options unvested
|
|
|
280,106
|
|
Total stock options granted at September 30, 2021
|
|
|
321,000
|
|
Stock Option activity for the nine months ended
September 30, 2021 was as follows:
|
|
Number
of
Stock Options
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding at December 31, 2020
|
|
|
-
|
|
|
|
-
|
|
Options granted
|
|
|
334,125
|
|
|
$
|
5.95
|
|
Options exercised
|
|
|
-
|
|
|
|
-
|
|
Options expired/forfeited
|
|
|
13,125
|
|
|
$
|
5.84
|
|
Outstanding at September 30, 2021
|
|
|
321,000
|
|
|
$
|
5.95
|
|
On April 22, 2021, the Company granted awards
of 64,125 Class A common stock options to employees. The stock option awards have four-year vesting periods, vesting 25% per year, and
have an exercise price of $5.73. Based upon a Black-Scholes calculation, the price per share to be expensed was $5.03 and a total cost
of $0.3 million would be expensed ratably over 48 months.
On May 5, 2021, the Company granted an award of
10,000 Class A common stock options to an employee. The stock option award has a four-year vesting period, vesting 25% per year, and has
an exercise price of $5.89. Based upon a Black-Scholes calculation, the price per share to be expensed was $5.17 and a total cost of less
than $0.1 million would be expensed ratably over 48 months.
On May 17, 2021, the Company granted an award
of 30,000 Class A common stock options to an employee. The stock option award has a four-year vesting period, vesting 25% per year, and
has an exercise price of $5.29. Based upon a Black-Scholes calculation, the price per share to be expensed was $4.64 and a total cost
of approximately $0.1 million would be expensed ratably over 48 months.
On June 1, 2021, the Company granted an award
of 5,000 Class A common stock options to an employee. The stock option award has a four-year vesting period, vesting 25% per year, and
has an exercise price of $6.77. Based upon a Black-Scholes calculation, the price per share to be expensed was $5.94 and a total cost
of less than $0.1 million would be expensed ratably over 48 months.
On July 20, 2021, the Company granted 225,000
Class A common stock options to executives. Mr. Green was granted 75,000 Class A common stock options and Mr. Lehr, Dr. Hare and Mr. Clavijo
were each granted 50,000 Class A common stock options. The stock options have four-year vesting periods, vesting 12.5% on July 22, 2021
and the remaining vesting equally over the remaining four years, with an exercise price of $6.08. Based upon a Black-Scholes calculation,
the price per share to be expensed was $5.32 and a total cost of $1.2 million would be expensed ratably over 48 months.
For the nine months ended September 30, 2021 and
2020, the equity-based compensation expense amounted to approximately $6.0 million ($2.5 million for the three months ended September
30, 2021) and $36,000 ($12,000 for the three months ended September 30, 2020), respectively, which is included in the research and development
and general and administrative expenses in the statements of operations for the nine months ended September 30, 2021 and 2020. As of September
30, 2021, the remaining unrecognized equity-based compensation of approximately $3.7 million will be recognized over approximately 3.8
years.
9. Commitments
and Contingencies
Master Services Agreements:
As of September 30, 2021, the Company had two
active master services agreements with third parties to conduct its clinical trials and manage clinical research programs and clinical
development services on behalf of the Company. The Company expects these agreements or amended current agreements to have total expenditures
of less than $1.0 million for 2021.
Consulting Services Agreement:
On November 20, 2014, the Company entered into
a ten-year consulting services agreement with its CSO. Under the agreement, the Company agreed to pay the CSO $270,000 annually. The compensation
payments are for scientific knowledge, medical research, technical knowledge, skills, and abilities to be provided by the CSO to further
develop the intellectual property rights assigned by the CSO to the Company. This agreement requires the CSO to also assign to the Company
the exclusive right, title, and interest in any work product developed from his efforts on behalf of the Company during the term of this
agreement. During the three months ended September 30, 2021, the Company paid $0.2 million towards the $0.3 million outstanding balance.
As of September 30, 2021, the Company had an accrued balance due to the CSO of $0.1 million and as of December 31, 2020 had a balance
due of $0.3 million.
Technology Services Agreement:
On March 27, 2015, the Company entered into a
technology services agreement with Optimal Networks, Inc. (a related company owned by a board member’s brother-in-law) for use of
information technology services. The Company agreed to issue the related party equity incentive units in the amount equal to 50% of the
charges for invoiced services, with such equity to be issued annually on or about the anniversary date of the agreement. During 2017,
the Company issued 1,901 Series C Units, and on November 22, 2019 and January 29, 2021, the Company issued 820 and 410 Series C Units,
respectively, as payment for an aggregate of $0.2 million of accrued technology services. The Series C units were converted to 16,755
Class A common stock shares as part of the Corporate Conversion. As of September 30, 2021, and December 31, 2020, the Company owed less
than $0.1 million, pursuant to this agreement, which is included in accounts payable in the September 30, 2021 and December 31, 2020 balance
sheets.
Exclusive Licensing Agreements:
UM Agreement
On November 20, 2014, the Company entered into
an exclusive license agreement with UM for the use of certain stem cell aging-related frailty technology rights developed by the CSO while
employed at UM. The Company recorded the value of the membership units issued to obtain this license agreement as an intangible asset.
The Company is required to pay UM up to 3% of net sales on products or services developed from the technology. The agreement extends for
up to 20 years from the last date a product or process is commercialized from the technology. Under the agreement, the Company is required
to pay an annual fee to UM. As of September 30, 2020, the Company had accrued $50,000 based on the terms of the agreement. In addition,
on November 14, 2014, as required by the license agreement, the Company issued 20,000 series C membership units valued at $0.5 million
to UM. The Company recorded this $0.5 million as an intangible asset that is amortized over the life of the license agreement which was
defined as 20 years. As of September 30, 2021, the Company had accrued less than $0.1 million in milestone fees payable to UM based on
the estimated progress to date.
The UM agreement was amended on March 3, 2021
to increase the license fee due to UM. The Company agreed to pay UM an additional fee of $0.1 million, which will be recorded as legal
costs, to defray patent costs, with $70,000 due within thirty (30) days of the effective date of the amendment, and the remainder to be
paid in equal installments of $7,500 on the 2nd, 3rd, and 5th year anniversaries of the effective
date. The Company also agreed to issue an additional 110,387 unregistered shares of Class A common stock shares to UM. The Company recorded
this $0.8 million as an intangible asset that is amortized over the life of the license agreement which was defined as 5 years. The Company
and UM agreed to the following modification of the milestone payments: (a) No payment will be due upon the completion of Phase 2 clinical
trials for the product; (b) a one-time payment of $0.5 million, payable within nine months of the completion of the first Phase 3 clinical
trial of the products (based upon the final data unblinding); (c) a one-time payment of $0.5 million payable within nine months of the
receipt by the Company of approval for the first new drug application, biologics application, or other marketing or licensing application
for the product; and (d) a one-time payment of $0.5 million payable within nine months of the first sale following product approval. “Approval”
refers to Product approval, licensure, or other marketing authorization by the U.S. Food and Drug Administration, or any successor agency.
The amendment also provided for the Company’s license of additional technology, to the extent not previously included in the UM
License, and granted the Company an exclusive option to obtain an exclusive license for (a) the HLHS IND with ckit+ cells; and (b) UMP-438
titled “Method of Determining Responsiveness to Cell Therapy in Dilated Cardiomyopathy.”
CD271
On December 22, 2016, the Company entered into
an exclusive license agreement with JMHMD Holdings, LLC, an affiliated entity of the CSO for the use of CD271 cellular therapy technology.
The Company recorded the value of the cash consideration and membership units issued to obtain this license agreement as an intangible
asset. The Company is required to pay as royalty 1% of the annual net sales of the licensed product(s) used, leased, or sold by or for
licensee or its sub-licensees. If the Company sublicenses the technology, it is also required to pay an amount equal to 10% of the net
sales of the sub-licensees. In addition, on December 23, 2016, as required by the license agreement, the Company paid an initial fee of
$250,000 to JMHMD, and issued to it 10,000 Series C Units, valued at $250,000. The $0.5 million of value provided to JMHMD for the license
agreement, along with professional fees of approximately $27,000, were recorded as an intangible asset that is amortized over the life
of the license agreement, which was defined as 20 years. Further, expenses related to the furtherance of the CD271+ technology is being
capitalized and amortized as incurred over 20 years. There were no license fees due during the nine months ended September 30, 2021 or
year ended December 31, 2020 pertaining to this agreement.
Other Royalty
Under the grant award agreement with the Alzheimer’s
Association, the Company may be required to make revenue sharing or distribution of revenue payments for products or inventions generated
or resulting from this clinical trial program. The potential payments, although not currently defined, could result in a maximum payment
of five times (5x) the award amount.
Contingencies – Legal
On September 13, 2021, the Company and certain
of our directors and officers were named as defendants in a securities lawsuit filed in the United States District Court for the Southern
District of Florida and brought on behalf of a purported class. The suit alleges there were materially false and misleading statements
made (or omissions of required information) in the Company’s initial public offering materials and in other disclosures during the
period from our initial public offering on February 12, 2021, through August 12, 2021, in violation of the federal securities laws. The
action seeks damages on behalf of a proposed class of purchasers of our common stock during said period. The Company believes, that these
allegations are without merit and intends to vigorously defend against them. The Company has not determined losses resulting from this
lawsuit as it is in the early stages and the ultimate outcome or range of losses, if any, cannot currently be determined.
Contingencies – COVID-19 Pandemic
The COVID-19 outbreak has impacted, and could
continue to adversely impact, the Company’s ability to conduct business. In December 2019, it was first reported that there had
been an outbreak of a novel strain of coronavirus, SARS-CoV-2, COVID-19, in China. As COVID-19 continues to spread globally, including
throughout the United States, the Company may experience disruptions that could severely impact its business, including:
|
●
|
impact to the financial markets;
|
|
●
|
disruption in the ability to provide our product in foreign
markets;
|
|
●
|
disruption on the ability to source materials;
|
|
●
|
disruption in the ability to manufacture our product;
|
|
●
|
delays or difficulties in completing the Company’s
regulatory work;
|
|
●
|
limitations on the Company’s employees’ ability
to work, including because of sickness of employees or their families or the desire of employees to avoid contact with large groups of
people; and
|
|
●
|
additional repercussions on the Company’s ability to
operate its business.
|
The global outbreak of COVID-19 continues to rapidly
evolve. The extent to which COVID-19 impacts the Company’s results will depend on future developments, which are highly uncertain
and cannot be predicted, including new information which may emerge concerning the severity of COVID-19, the duration and severity of
ongoing outbreaks, continued travel restrictions imposed by countries in which the Company conducts business, business closures or other
business disruption in the world, including with respect to the Company’s supply chains, a reduction in time spent out of home and
the actions taken throughout the world, including in the Company’s markets, to contain COVID-19 or mitigate its impact. The future
impact of the outbreak remains highly uncertain and cannot be predicted, and the Company cannot provide any assurance that the outbreak
will not have a material adverse impact on the Company’s operations or future results or filings with regulatory health authorities.
The extent of the pandemic’s ultimate impact on the Company will depend on future developments, including actions taken to contain
COVID-19.
The Company continues to monitor how the COVID-19
pandemic is affecting the Company’s employees, business, and clinical trials. In response to the spread of COVID-19, employees who
can perform their essential employment duties from home may continue to do so at their choice. Some of these employees are using a hybrid
approach, with some days in the office and some days working remotely. The Company’s laboratory scientists, cell processing scientists
and other manufacturing personnel continue to work from the Company’s GMP facility on a day-to-day basis, and as such cell production
has been minimally impacted. When the pandemic began to emerge in the U.S., most of the Company’s ongoing clinical trials had completed
enrollment, however a few subjects that were currently on study and in follow-up experienced some difficulties in adhering to the protocol
schedule. Because the Company primarily enrolls elderly subjects in the trials, who remain at particular risk for poor outcomes related
to COVID-19 infection, the Company has experienced some disruption in executing the follow-up visits in Company protocols. While the Company
believes the number of instances where a visit was missed completely is small, the Company cannot predict whether this will have a material
impact on the Company clinical results in the future. If too many subjects drop-out or the protocol is no longer effective, the Company
may have to restart the clinical trial entirely.
10.
Short-term Note Payable
On September 27, 2020, the Company entered into
a premium finance agreement to finance its insurance policies for approximately $63,000. The note required a down payment of $6,334, ratable
monthly payments of $6,499, including interest at 5.353% and matured in September 2021. As of September 30, 2021, the outstanding balance
was paid in full.
11.
Long-term Loan
On April 16, 2020, the Company received a loan
from the Small Business Administration (“SBA”) pursuant to the Paycheck Protection Program (“PPP”) as part of
the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) in the amount of $300,390. The loan had interest at a
rate of 1.00%, and initial maturity in 24 months. It was anticipated that not more than 25% of the forgiven amount may be for non-payroll
costs. The Company also received $10,000 from the SBA for the Economic Relief Fund; this amount does not need to be repaid and was recorded
as Other Income for the year ended December 31, 2020. As of December 31, 2020, the outstanding balance of the PPP loan was $300,390. On
March 4, 2021, the full balance due for the PPP loan was forgiven by the SBA.
On May 12, 2020, the Company received a loan from
the SBA pursuant to the Disaster Recovery Plan as part of the CARES Act in the amount of $150,000. The Company began repayment on July
20, 2021 of $731 per month. The note will mature in 30 years and bears an interest rate of 3.75%. Due to part of the notes being due within
one year, the Company recorded $5,000 and $139,000 in the current portion of loans line on the Balance Sheet as of September 30, 2021
and December 31, 2020, respectively.
Future debt obligations
at September 30, 2020 for Long-term loans are as follows (in thousands):
Year Ending December 31,
|
|
Amount
|
|
2021 (remaining three months)
|
|
$
|
1
|
|
2022
|
|
|
3
|
|
2023
|
|
|
3
|
|
2024
|
|
|
3
|
|
2025
|
|
|
3
|
|
Thereafter
|
|
|
135
|
|
Total
|
|
$
|
148
|
|
12.
Employee Benefits Plan
The Company sponsors a defined contribution employee
benefit plan (the “Plan”) under the provisions of Section 401(k) of the Internal Revenue Code. The Plan covers substantially
all full-time employees of the Company who have completed one year of service. Contributions to the Plan by the Company are at the discretion
of the Board of Directors.
The Company contributed approximately $49,000
and $34,000 to the Plan during the nine months ended September 30, 2021 and 2020, respectively and $18,000 and $13,000 for the three months
ended September 30, 2021 and 2020, respectively.
13.
Loss Per Share
Basic and diluted net loss per share have been
computed using the weighted-average number of shares of common stock outstanding during the period. We have outstanding stock-based awards
that are not used in the calculation of diluted net loss per share because to do so would be anti-dilutive. These common share equivalents
were as follows at September 30, 2021 and 2020:
|
|
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
|
|
RSUs
|
|
|
898
|
|
|
|
-
|
|
Stock options
|
|
|
321
|
|
|
|
-
|
|
Warrants
|
|
|
106
|
|
|
|
-
|
|
Total
|
|
|
1,325
|
|
|
|
-
|
|
14. Subsequent
Events
On October 1, 2021, previously disclosed RSUs
granted to employees and directors vested. A total of 657,062 RSUs vested of which 355,495 were held by Company employees. RSUs are taxable
upon vesting based on the market value on the date of vesting. The Company is required to make mandatory tax withholding for the payment
and satisfaction of income tax, social security tax, payroll tax, or payment on account of other tax related to withholding obligations
that arise by reason of vesting of an RSU. The taxable income is calculated by multiplying the number of vested RSUs for each individual
by the $3.65 closing price as of the vesting date (October 1, 2021) and a tax liability is calculated based on each individual’s
tax bracket. As a result, on October 5, 2021, the Company recorded a tax liability of $451,000 for the employees and a corresponding tax
liability for the Company of $38,000. In total, the Company paid $489,000 for employee and employer taxes that resulted from the vesting
of RSUs. In order to cover the employee tax liability, the Company withheld 123,659 Class A common stock shares owned by the Company’s
employees upon vesting. The shares received have been transferred into the 2021 Incentive Plan.