Item 7. 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 financial statements and related notes thereto and other financial information
appearing elsewhere in this 10-K. This 10-K contains forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. See “Cautionary Note Regarding Forward-Looking Statements” and Part I, Item 1A, “Risk Factors.”
Readers are also urged to carefully review and consider these and other disclosures made by us which attempt to advise interested parties
of the factors which affect our business.
Introduction and Overview
We are a clinical stage biotechnology company
developing regenerative medicines to address unmet medical needs. The Company’s lead investigational product is Lomecel-BTM.
Lomecel-BTM has multiple modes of action that include pro-vascular, pro-regenerative, and anti-inflammatory mechanisms, promoting
tissue repair and healing with broad potential applications across a spectrum of disease areas.
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We are currently pursuing three pipeline indications:
Hypoplastic Left Heart Syndrome (HLHS), Aging-related Frailty, and Alzheimer’s disease (AD). Our mission is to advance Lomecel-B
and other cell-based product candidates into pivotal Phase 3 trials, with the goal of achieving regulatory approvals, subsequent commercialization,
and broad use by the healthcare community.
With respect to HLHS, we are exploring the possibility
that Lomecel-B when administered directly to the myocardium of affected infants, can improve outcomes in this devastating rare pediatric
disease. The standard of care in HLHS is a series of three reconstructive surgeries, typically at 10 days, 4 months, and approximately
4 years of life. Despite these life-saving surgical interventions, it is estimated that only 50 to 60 percent of affected individuals
survive until adolescence. The pro-vascular, pro-regenerative and anti-inflammatory properties of Lomecel-B may improve the function
of the right ventricle in these infants. A previous Longeveron Phase 1 open-label study indicated that such a benefit may exist when
outcomes were compared to historical controls. Longeveron is currently conducting a controlled study to determine the actual benefit
of Lomecel-B in these patients.
As of March 7, 2023, we have completed four U.S.
clinical studies of Lomecel-B: Phase 1 AD, Phase 1 HLHS, Phase 1/2 Aging-related frailty (“HERA Trial”) and Phase 2b Aging-related
frailty. We currently have three clinical trials actively enrolling patients: Phase 2a HLHS (“ELPIS II” trial), Phase 2a
AD and Japan Phase 2 study in Japanese patients with Aging-related frailty. Additionally, we sponsor a registry in The Bahamas under
the approval and authority of the National Stem Cell Ethics Committee. The Bahamas Registry Trial administers Lomecel-B to eligible participants
at two private clinics in Nassau for a variety of indications. While Lomecel-B is considered an investigational product in The Bahamas,
under the approval terms from the National Stem Cell Ethics Committee, we are permitted to charge a fee to participate in the Registry
Trial.
Since our founding in 2014, we have focused the
majority of our time and resources on the following: organizing and staffing our company, building, staffing and equipping a cGMP manufacturing
facility with research and development labs, business planning, raising capital, establishing our intellectual property portfolio, generating
clinical safety and efficacy data in our selected disease conditions and indications, and developing and expanding our manufacturing
processes and capabilities.
We manufacture all of our own product candidates
for clinical trials. In 2017 we opened a manufacturing facility comprised of eight clean rooms, two research and development laboratories,
and warehouse and storage space. We have supply contracts with multiple third parties for fresh bone marrow, which we use to produce
our product candidate for clinical testing and research and development. From time to time, we enter into contract development and manufacturing
contracts or arrangements with third parties who seek to utilize our product development capabilities.
Since the time that we became a publicly traded
company in February, 2021, we have sold 4,079,288 shares of Class A Common Stock through our IPO and a December 2021 private issuance
of public equity (PIPE) offering, and warrants to purchase 1,169,288 shares of Class A Common Stock at an initial exercise price of $17.50
per share, for aggregate gross proceeds of $49.6 million prior to discounts, commissions and other offering expenses.
When appropriate funding opportunities arise,
we routinely apply for grant funding to support our ongoing research and since 2016 we have received approximately $16.0 million in grant
awards ($11.9 million of which has been directly awarded to us and is recognized as revenue when the performance obligations are met)
from the National Institute on Aging (NIA) of the National Institutes of Health (NIH), the National Heart Lung and Blood Institute (NHLBI)
of the NIH, the Alzheimer’s Association, and the Maryland Stem Cell Research Fund (MSCRF) of the Maryland Technology Development
Corporation, or TEDCO.
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Components of Our Results of Operations
Revenue
We have generated revenue from three sources:
Cost of Revenues
We record cost of revenues based on expenses
directly related to revenue. For grants we record 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 accrued as incurred. These expenses are
similar to those described under “Research and development expense” below.
Selling and Marketing Expenses
Selling and marketing expenses consist primarily
of royalty and license fees associated with our agreements with the University of Miami (“UM”), as well as attending and
sponsoring industry, investment, organization and medical conferences and events.
Research and Development Expenses
Research and development costs are charged to
expense when incurred in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 730 Research and Development. 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 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. We accrue for costs incurred by external service providers, including CROs and
clinical investigators, based on estimates of service performed and costs incurred. These estimates include the level of services performed
by the third parties, subject 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, we 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.
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We currently do not carry any inventory for our
product candidates, as we have yet to launch a product for commercial distribution. Historically our operations have focused on conducting
clinical trials, product research and development efforts, and improving and refining our manufacturing processes, and accordingly, manufactured
clinical doses of product candidates were expensed as incurred, consistent with the accounting for all other research and development
costs. Once we begin commercial distribution, all newly manufactured approved 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.
We expect that our research and development expenses
will increase in the future as we increase our headcount to support increased research and development activities relating to our clinical
programs, as well as incur additional expenses related to our clinical trials.
General and Administrative Expenses
General and administrative expenses consist primarily
of salaries and other related costs, including stock-based compensation, for personnel in our executive, finance, business development
and administrative functions. General and administrative expenses also include public company related expenses; legal fees relating to
corporate matters; insurance costs; professional fees for accounting, auditing, tax and consulting services; travel expenses; and facility-related
expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs.
We expect that our general and administrative
expenses will increase in the future as we increase our headcount to support increased administrative activities as a public company.
We also expect to continue to incur expenses associated with being a public company, including costs of accounting, audit, legal, regulatory
and tax-related services associated with maintaining compliance with Nasdaq and SEC requirements, director and officer insurance costs,
and investor and public relations costs.
Other Income and Expenses
Interest income consists of interest earned on
cash equivalents and short-term investments. We expect our interest income to increase due to the current cash and short-term investment
balances. Other income consists of funds earned that are not part of our normal operations. In past years they have been primarily a
result of tax refunds received for social security taxes as part of a research and development tax credit program.
Income Taxes
As of December 31, 2022, we are treated as a
C corporation for federal and state income tax purposes. Prior to February 12, 2021, we were treated as a partnership for federal and
state income tax purposes, whereby we passed our earnings and losses through to our members based on the terms of our Operating Agreement.
No provision for income taxes has been recorded for the years ended December 31, 2022, and 2021. We may incur income taxes in the future
if we have earnings. At this time the Company has not evaluated the impact of any future profits.
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED DECEMBER 31,
2022 and 2021
The following table summarizes our results of
operations for the years ended December 31, 2022 and 2021, together with the changes in those items in dollars (in thousands):
Year Ended December 31, Increase
Operating Expenses
Other (expenses) and income
Forgiveness of Paycheck Protection Program loan - 300 (300 )
Interest expense - (4 ) 4
Total other (expenses) and income, net (792 ) 411 (1,203 )
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Revenues, Cost of Revenues and Gross Profit:
Revenues for the years ended December 31, 2022 and 2021 were $1.2 million and $1.3 million, respectively. The $0.1 million, or 6%,
decrease when compared to 2021 was primarily due to a decrease in grant revenue year-over-year. Grant revenue for the year ended December
31, 2022 and 2021 was $0.3 million and $0.6 million, respectively. The decrease of $0.3 million, or 53% decrease when compared to 2021,
was primarily due to a reduction in grant funds available due in part to the completion of the grant-funded clinical trials. Clinical
trial revenue, which is derived from the Bahamas Registry Trial, for the year ended December 31, 2022 and 2021 was $0.9 million and $0.7
million, respectively. Clinical trial revenue for the year ended December 31, 2022 increased by $0.2 million, or 33%, higher when compared
to 2021 as a result of less COVID-19 travel restrictions, were less in 2022 as compared to 2021, and increased participant demand in
the Bahamas Registry Trial in 2022.
Related cost of revenues was $0.7 million for
the years ended December 31, 2022 and 2021. The less than $0.1 million, or 1%, increase when compared to 2021, was primarily due to more
direct costs associated with our clinical trial revenue than our grants program. This resulted in a gross profit of approximately $0.5
million for the year ended December 31, 2022, a decrease of $0.1 million, or 16%, when compared with a gross profit of approximately
$0.6 million for 2021.
General and Administrative Expense: General
and administrative expenses for the year ended December 31, 2022 decreased to approximately $8.1 million, compared to $9.7 million for
the same period in 2021. The decrease of approximately $1.6 million, or 17%, was primarily related to a decrease of $3.0 million in equity-based
compensation expenses allocated to general and administrative expenses. However, employee benefit expenses increased by $0.5 million,
which included a $0.4 million increase in expenses related to employee recruitment and insurance and professional fees increased by $0.2
million.
Research and Development Expenses: Research
and development expenses for the year ended December 31, 2022 increased to approximately $9.4 million, from approximately $7.1 million
for the same period in 2021. The increase of $2.3 million, or 32%, was primarily due to an increase of $2.6 million in research and development
expenses that were not reimbursable by grants. The increase was offset by a decrease in equity-based compensation allocated to research
and development expenses, which decreased from $2.2 million in 2021 to $1.1 million in 2022. Research and development expenses consisted
primarily of the following items (less those expenses allocated to the cost of revenues for the grants)(in thousands):
Year Ended December 31,
Supplies and costs to manufacture Lomecel-BTM 817 504
Employee compensation and benefits 2,203 1,354
Selling and Marketing Expenses: Selling
and marketing expenses for each of the years ended December 31, 2022 and 2021 was $1.0 million and $1.2 million, respectively. The decrease
of $0.2 million, or 13%, was primarily due to a decrease in digital marketing expenses. Selling and marketing expenses consists primarily
of investor and public relations expenses. Further and as disclosed in Note 13. Reclassification of Prior Year Presentations,
during 2021, $0.9 million in expenses related to investor and public relations was recorded as general and administrative expenses and
was reclassified as selling and marketing expenses as they were in 2022.
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Non-operating Lawsuit expense:
Non-operating Lawsuit expense for the year ended December 31, 2022 was approximately $1.4 million. This expense was deemed probable
and therefore the amount was accrued in this period. Additional detail can be found in Part I, Item 3 “Legal
Proceedings” of this Form 10-K. Legal expenses incurred in ordinary business activities are reported within general and
administrative expenses.
Forgiveness of Paycheck Protection Program
loan: Forgiveness of Paycheck Protection Program loan for the year ended December 31, 2022 was $0, compared to $0.3 million for the
same period in 2021, due to the non-recurring nature of the forgiveness of the PPP loan.
Other tax credits: Other tax credits for
each of the years ended December 31, 2022 and 2021 was $0.3 million and $0.1 million, respectively. Other tax credit increased in 2022
due to receiving the Employee Retention Credit under the CARES Act which encourages businesses to keep employees on their payroll. Eligible
businesses receive a refundable tax credit of up to 50% of up to $10,000 in wages paid.
Other Income, net: Other income for the
years ended December 31, 2022 and 2021 was $0.3 million and $0.1 million, respectively. Other income for 2022 increased as a result of
an increase in realized returns from marketable securities of $0.2 million. Also recorded was approximately $27,000 for a gain resulting
from foreign currency changes and $27,000 of sublease rental income. During 2021, $125,000 was received in rental payments recorded from
a sublease, $60,000 from recorded investment income, $17,000 from a gain resulting from an equity exchange, $85,000 unrealized loss on
marketable securities and $60,000 for a loss on disposal of equipment.
Net Loss: Net loss increased to approximately
$18.8 million for the year ended December 31, 2022, from a net loss of $17.0 million for the same period in 2021. The increase in the
net loss of $1.8 million, or 11%, was for reasons outlined above.
Cash Flows
The following table summarizes our sources and
uses of cash for the period presented for the (in thousands):
Year Ended December 31,
Net cash used in operating activities $ (13,969 ) $ (9,636 )
Net cash used in investing activities (677 ) (10,696 )
Net cash (used in) provided by financing activities (509 ) 45,174
Net (decrease) increase in cash and cash equivalents $ (15,155 ) $ 24,842
Operating Activities. We
have incurred losses since inception. Net cash used in operating activities for the year ended December 31, 2022 was $14.0 million, consisting
primarily of our net loss of $18.8 million as we incurred $1.4 million in non-operating lawsuit expenses, $2.3 million in equity-based
compensation expenses and $0.9 million in depreciation and amortization expenses. Net cash used in operating activities for the year
ended December 31, 2021 was $9.6 million, consisting primarily of our net loss of $17.0 million as we incurred expenses associated with
research activities for our lead product candidates and incurred general and administrative expenses, including an aggregate of $6.4
million of equity-based compensation recorded for RSUs and stock options granted and $1.3 million for non-cash stock payments to consultants.
Investing Activities. Net
cash used in investing activities for year ended December 31, 2022 was $0.7 million, consisting primarily of an increase in purchases
of equipment of $0.6 million and purchases of intangibles of $0.3 million. Net cash used in investing activities for year ended December
31, 2021 was $10.7 million, consisting primarily of an increase of $9.4 million in marketable securities, recorded CRADA license agreement
to intangibles of $0.8 million, and purchases of equipment of $0.3 million.
Financing Activities. Net
cash used in financing activities for the year ended December 31, 2022 was $0.5 million consisting primarily of $0.5 million in payment
of taxes and consultants. Net cash provided by financing activities for the year ended December 31, 2021 was $45.2 million consisting
primarily of $26.7 million in net proceeds received from our IPO and $18.6 million in net proceeds received from the 2021 PIPE Offering.
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LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have incurred significant
operating losses. We expect to incur significant expenses and operating losses as we advance the preclinical and clinical development
of our programs. We expect that our sales, research and development and general and administrative costs will increase in connection
with conducting additional preclinical studies and clinical trials for our current and future programs and product candidates, contracting
with CROs to support preclinical studies and clinical trials, expanding our intellectual property portfolio, and providing general and
administrative support for our operations. As a result, we will need additional capital to fund our operations, which we may obtain from
additional equity or debt financings, collaborations, licensing arrangements, or other sources.
To date, we have financed our operations primarily
through our IPO, private placement equity financings, grant awards, and fees generated from the Bahamas Registry Trial and contract manufacturing
services. Since we were formed, we have raised approximately $77.2 million in gross proceeds from the issuance of equity. As of December
31, 2022, the Company had cash and cash equivalents of $10.5 million, marketable securities of $9.2 million and working capital of approximately
$15.4 million.
Capital Raising Efforts
In our IPO, we sold 2,910,000 shares of Class
A Common Stock at a public offering price of $10.00 per share for aggregate gross proceeds of $29.1 million, inclusive of the underwriter’s
partial exercise of its over-allotment option, prior to deducting underwriting discounts, commissions, and other offering expenses.
The underwriter received warrants to purchase
106,400 Class A Common Stock shares. 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. During 2021, the underwriters
assigned 95,760 of the warrants to its employees. As of December 31, 2022, 51,061 warrants have been exercised, which provided net proceeds
to the Company of $0.6 million.
On December 3, 2021, we closed our 2021 PIPE
Offering, whereby we undertook a private purchase and sale to certain accredited investors of an aggregate of 1,169,288 shares of our
Class A Common Stock and Purchase Warrants to purchase 1,169,288 shares of Class A Common Stock at an initial exercise price of $17.50 per
share, resulting in aggregate gross proceeds of $20.5 million prior to deducting fees and offering expenses. We also issued Representative
Warrants exercisable for 46,772 shares of Class A Common Stock to affiliates of Placement Agent with an initial exercise price of $17.50 per
share.
Grant Awards
From inception through December 31, 2022, we
have been awarded approximately $11.9 million in governmental and non-profit association grants, which have been used to fund our
clinical trials, research and development, production and overhead. Grant awards are recognized as revenue, and depending on the funding
mechanism, are deposited directly in our accounts as lump sums, which are staggered over a predetermined period or drawn down from a
federal payment management system account for reimbursement of expenses incurred. Revenue recognition occurs when the grant related expenses
are incurred, or supplies and materials are received. As of December 31, 2022, and 2021, the amount of unused grant funds that were available
for us to draw was approximately $0.8 million and $1.4 million, respectively. The following table summarizes the grants awarded.
Longeveron Project Funding Agency(1) Total Amount ($) Status of Award
Aging-related frailty Phase 2b Trial SBIR (DHHS) NIA 3,957,813 Complete
Aging-related frailty Phase 2b Trial SBIR (DHHS) NIA 283,040 Complete
Alzheimer’s Disease Phase 1 Trial(2) Alzheimer’s Association 3,000,000 Complete
Alzheimer’s Disease Phase 1 Trial Alzheimer’s Association 1,000,000 Complete
The Metabolic Syndrome Sub-Study STTR (DHHS) NIA 150,000 Complete
The Metabolic Syndrome Sub-Study STTR (DHHS) NIA 901,486 Complete
HLHS Phase 1 Trial MSCRF - TEDCO 750,000 Complete
HLHS Phase 2 Trial(3) UG3 (DHHS) NHLBI 477,566 Ongoing
ARDS Phase 1(4) MSCRF - TEDCO 650,000 Ongoing
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(4) MSCRF - TEDCO has sent the first tranche of $325,000.
Terms and Conditions of Grant Awards
Grant projects are typically divided into periods
(e.g., a three-year grant may have three one-year periods), and the total amount awarded is divided according to the number of periods.
At pre-specified time points, which are detailed in the grant award notifications, we are required to submit interim financial and scientific
reports to the granting agency totaling funds spent, and in some cases, detailing use of proceeds and progress made during the reporting
period. After funding the initial period, receipt of additional grant funds is contingent upon satisfactory submission of our interim
reports to the granting agency.
Grant awards arise from submitting detailed research
proposals to granting agencies, and winning a highly competitive and rigorous application review and process that is judged on the merits
of the proposal. There are typically multiple applicants applying and competing for a finite amount of funds. As such we cannot be sure
that we will be awarded grant funds in the future despite our past success in receiving such awards.
Funding Requirements
Our operating costs will continue to increase
substantially for the foreseeable future in connection with our ongoing activities. In past years we have been able to fund a large portion
of our clinical programs and our administrative overhead with the use of grant funding.
Specifically, our expenses will increase as we:
● maintain, expand and protect our intellectual property portfolio;
We believe that our existing cash and cash equivalents
will enable us to fund our operating expenses and capital expenditure requirements through second half of 2024. We have based these estimates
on assumptions that may prove to be imprecise, and we could utilize our available capital resources sooner than we expect.
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Because of the numerous risks and uncertainties
associated with research, development and commercialization of our product candidates, it is difficult to estimate with certainty the
amount of our working capital requirements. Our future funding requirements will depend on many factors, including:
Further, our operating results may change in
the future, and we may need additional funds to meet operational needs and capital requirements associated with such operating plans.
Until such time, if ever, that we can generate product revenue sufficient to achieve profitability, we expect to finance our cash needs
through a combination of equity offerings, debt financings, grant awards, collaboration agreements, other third-party funding, strategic
alliances, licensing arrangements and marketing and distribution arrangements.
We currently have no credit facility or committed
sources of capital. Debt financing and preferred equity 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.
If we raise additional funds through other third-party funding, collaboration agreements, strategic alliances, licensing arrangements
or marketing and distribution arrangements, we may have to relinquish valuable rights to our technologies, future revenue streams, research
programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds
through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate our biologic drug development
or future commercialization efforts or grant rights to develop and market products or product candidates that we would otherwise prefer
to develop and market ourselves.
In order to meet our operational goals, we will
need to obtain additional capital, which we will likely obtain through a variety of means, including through public or private equity,
debt financings or other sources, including up-front payments and milestone payments from strategic collaborations. To the extent that
we raise additional capital through the sale of convertible debt or equity securities, your ownership interest will be diluted, and the
terms may include liquidation or other preferences that adversely affect your rights as a stockholder. Such financing may result in dilution
to stockholders, imposition of debt covenants, increased fixed payment obligations or other restrictions that may affect our business.
If we raise additional funds through up-front payments or milestone payments pursuant to strategic collaborations with third parties,
we may have to relinquish valuable rights to our product candidates, or grant licenses on terms that are not favorable to us. In addition,
we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds
for our current or future operating plans.
Contractual Obligations and Commitments
As of December 31, 2022, we have $3.0 million
in operating lease obligations and $2.9 million in contract research organization obligations. We enter into contracts in the normal
course of business with third-party contract organizations for clinical trials, preclinical studies, manufacturing and other services
and products for operating purposes. These contracts generally provide for termination following a certain period after notice and therefore
we believe that our non-cancelable obligations under these agreements are not material.
We have not included milestone or royalty payments
or other contractual payment obligations if the timing and amount of such obligations are unknown or uncertain.
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Critical Accounting Policies and Use of Estimates
Our management’s discussion and analysis
of financial condition, results of operations and liquidity are based on our financial statements, which have been prepared in accordance
with generally accepted accounting principles in the U.S. (“U.S. GAAP”). The preparation of our financial statements and
related disclosures requires us to make estimates, judgements and assumptions that affect the reported amounts of assets and liabilities
and the 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. We base our estimates on historical experience, known trends and events and various other factors
that we believe are 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. We evaluate our estimates and assumptions on an ongoing basis.
Our actual results may materially differ from these estimates under different assumptions or conditions. On an on-going basis, we review
our estimates to ensure that they appropriately reflect changes in our business or new information as it becomes available.
While our significant accounting policies are
described in more detail in the notes to our financial statements included in this 10-K, we believe that the following accounting policies
are those most critical due to the judgments and estimates used in the preparation of our financial statements.
Impairment of Long-Lived Assets. We evaluate
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. Management determined that there was no impairment
of long-lived assets during the years ended December 31, 2022 and 2021.
Revenue recognition. Effective January
1, 2018, we adopted ASC Topic 606, Revenue from Contracts with Customers, which establishes a single and comprehensive framework on how
much revenue is to be recognized, and when. The core principle is that a vendor should recognize revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the vendor expects to be entitled in exchange for
those goods or services. Revenue will be recognized by a vendor when control over the goods or services is transferred to the customer.
We recognize revenue when performance obligations
related to respective revenue streams are met. For grant revenue, we consider the performance obligation met when the grant related expenses
are incurred, or supplies and materials are received. For clinical trial revenue, we consider the performance obligation met when the
participant has received the therapy. For Contract Manufacturing Revenue, we consider the performance obligation met when the contractual
obligation and / or statement of work has been satisfied.
Research and development expense. Research
and development costs are charged to expense when incurred in accordance with FASB ASC 730, Research and Development. Research and development
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. We accrue for costs incurred by external service providers, including contract research organizations and clinical investigators,
based on estimates of service performed and costs incurred. These estimates include the level of services performed by the third parties,
subject 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, we 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.
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Emerging Growth Company Status
We are an “emerging growth company,”
as defined in the Jumpstart Our Business Startups Act, or JOBS Act, which is a law intended to encourage funding of small businesses
in the U.S. by easing many of the country’s securities regulations, and we may take advantage of reduced reporting requirements
that are otherwise applicable to public companies. Section 107 of the JOBS Act exempts emerging growth companies from being required
to comply with new or revised financial accounting standards until private companies are required to comply with those standards. We
have elected to take advantage of the extended transition period for complying with new or revised accounting standards; and as a result
of this election, our financial statements may not be comparable to companies that comply with public company effective dates. The JOBS
Act also exempts us from having to provide an auditor attestation of internal control over financial reporting under Sarbanes-Oxley Act
Section 404(b).
We will remain an “emerging growth company”
until the earliest of (1) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more, (2)
the last day of the fiscal year following the fifth anniversary of the completion of our IPO, (3) the date on which we have issued more
than $1.0 billion in nonconvertible debt during the previous three years or (4) the date on which we are deemed to be a large accelerated
filer under the rules of the SEC, which generally is when a company has more than $700 million in market value of its reported class
of stock held by non-affiliates and has been a public company for at least 12 months and have filed at least one Annual Report on Form
10-K.
Recent Accounting Pronouncements
A description of recent accounting pronouncements
that may potentially impact our financial position, results of operations or cash flows is disclosed in Note 2 to our audited financial
statements included in Item 8 of this 10-K.
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk.
We are exposed to market risks in the ordinary
course of our business. These risks primarily include interest rate sensitivities. We held cash, cash equivalents and marketable securities
of approximately $19.7 million as of December 31, 2022. We generally hold our cash in interest-bearing money market accounts. Our primary
exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. Due to
the short-term maturities of our cash equivalents and the low risk profile of our investments, an immediate 100 basis point change in
interest rates would not have a material effect on the fair market value of our cash equivalents.
Item 8. Financial Statements and Supplementary
Data
The information required by this Item 8 is contained
on the audited financial statements and accompanying notes located at the end of this 10-K and is incorporated herein by reference.
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures.
Our management, with the participation of our
principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15 (e) under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”)) as of December 31, 2022. Disclosure controls and procedures include, without limitation, controls and procedures designed
to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated
and communicated to its management, including its principal executive and principal financial officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily
applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
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Management did not identify material weaknesses
in our internal control over financial reporting, which is an integral component of our disclosure controls and procedures. A material
weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely
basis. However, we do believe we can design and maintain more effective controls in 2023. These may include: additions to personnel and
or consultants; and formalizing and improving our accounting policies, procedures and controls.
Based on the evaluation of our disclosure controls
and procedures as of December 31, 2022, our principal executive officer and principal financial officer concluded that, as of such date,
our disclosure controls and procedures were effective at the reasonable assurance level.
Management’s
Responsibility for Financial Statements
Our management is responsible
for the integrity and objectivity of all information presented in this 10-K. The financial statements were prepared in conformity with
accounting principles generally accepted in the United States of America and include amounts based on management’s best estimates
and judgments. Management believes the financial statements fairly reflect the form and substance of transactions and that the financial
statements fairly represent the Company’s financial position and results of operations for the periods and as of the dates stated
therein.
The Audit Committee
of the Board of Directors, which is composed solely of independent directors, meets regularly with our independent registered public
accounting firm, Marcum LLP and representatives of management to review accounting, financial reporting, internal control, and audit
matters, as well as the nature and extent of the audit effort. The Audit Committee is responsible for the engagement of the independent
auditors. The independent auditors have free access to the Audit Committee.
Changes in Internal Control over Financial
Reporting
There were no changes in our internal control
over financial reporting identified in connection with the evaluation of such internal control required by Rule 13a-15(d) and 15d-15(d)
of the Exchange Act that occurred during the fiscal year ended December 31, 2022 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
Management’s Annual Report on Internal
Control over Financial Reporting
Our management, including the Chief Executive
Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act).
Our management, including the Chief Executive
Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2022.
Management based this assessment on criteria for effective internal control over financial reporting described in “Internal Control-Integrated
Framework 2013” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management
determined that, as of December 31, 2022, we maintained effective internal control over financial reporting.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions
that Prevent Inspections.
None.
69
PART III
Certain information required by Part III is omitted
from this Annual Report on Form 10-K and incorporated by reference to our definitive Proxy Statement for our 2023 Annual Meeting of Shareholders,
or our 2023 Proxy Statement, to be filed pursuant to Regulation 14A of the Exchange Act. If our 2022 Proxy Statement is not filed within
120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, the omitted information will be included in an amendment
to this Annual Report on Form 10-K filed not later than the end of such 120-day period.
Item 10. Directors, Executive Officers and
Corporate Governance
The information required by this item is to be
included in our 2023 Proxy Statement as follows:
We have adopted a written Code of Conduct and
Ethics, or Ethics Code, that applies to all officers, directors and employees, including our principal executive officer, principal financial
officer, principal accounting officer or controller, or persons performing similar functions. The Ethics Code is available on our website
at www.horizontherapeutics.com. If we make any substantive amendments to the Ethics Code or grant any waiver from a provision of the Ethics
Code to any executive officer or director, we will promptly disclose the nature of the amendment or waiver on our website or in a Current
Report on Form 8-K.
Item 11. Executive Compensation
The information required by this item is to be
included in our 2023 Proxy Statement under the sections entitled “Executive Compensation,” “Non-Employee Director Compensation,”
“The Board of Directors and its Committees—Compensation Committee Interlocks and Insider Participation” and “Compensation
Discussion and Analysis” and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters
The information required by this item with respect
to equity compensation plans is to be included in our 2023 Proxy Statement under the section entitled “Equity Compensation Plan
Information” and the information required by this item with respect to security ownership of certain beneficial owners and management
is to be included in our 2023 Proxy Statement under the section entitled “Other Information—Security Ownership of Certain
Beneficial Owners and Management.”
Item 13. Certain Relationships and Related Transactions and Director
Independence
The following includes a summary of transactions
as of December 31, 2022 to which we have been a party in which the amount involved exceeded or will exceed $120,000, and in which any
of our directors, executive officers or, to our knowledge, beneficial owners of more than 5% of our capital stock, or 5% Security Holders,
or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest, other than
equity and other compensation, termination, change in control and other arrangements, which are described under “Employment and
Consulting Agreements with our NEOs”. We also describe below certain other transactions with our directors, executive officers
and stockholders.
70
The following transaction are the Company’s
related party transactions as of December 31, 2022:
On March 27, 2015, the Company entered into a
technology services agreement with Optimal Networks, Inc. (a related company owned by Dr. Joshua Hare’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 of December 31, 2022 and 2021, the Company owed less than $0.1 million, pursuant to this agreement, which
is included in accounts payable in the December 31, 2022 and 2021 balance sheets.
We utilize Global Vision Communications, LLC,
a service provider owned by a member of our board, Mr. Neil Hare, for public relations, information technology and web development services.
Payment of invoices for services provided are made in cash or through the issuance of our Series C Units as mutually agreed to by the
parties. Amounts incurred amounted to approximately $126,000 and $10,000 during the year ended December 31, 2022 and 2021, respectively.
As of December 31, 2022, and 2021, the Company owed $0 to the related entity.
We are a licensee under an exclusive license agreement
with JMHMD Holdings, LLC, an affiliate of our Chief Science Officer and director, for the use of CD271+ cellular therapy technology, a
subpopulation of bone marrow-derived MSCs. We are required to pay a royalty of one percent of the annual net sales of the licensed product(s)
used, leased, or sold by or for us by any sub-licensees. If we sublicense the technology, we are also required to pay an amount equal
to 10% of the net sales of the sub-licensees. The agreement is to remain in effect until either the date all issued patents and filed
patent applications have expired or been abandoned, or 20 years after the date of FDA approval of the last commercialized product or process
arising from the patent rights, whichever comes later. There were no license fees due as of December 31, 2022 and 2021 pertaining to this
agreement. The Company to date has not incurred any royalty or sublicense related expense, but has paid $45,000 in license fees($10,000
per year for 2021, 2020 and 2019) and for a $15,000 extension fee. In addition, the Company paid legal fees of approximately, $17,000
and $42,000 for each of the years ended December 31, 2022 and 2021, in connection with the patent prosecution, issuance, and maintenance
fees related to CD271+ technology.
Indemnification Agreements
We have indemnification agreements with each of
our directors and executive officers. These agreements, among other things, require us or will require us to indemnify each director and
executive officer to the fullest extent permitted by Delaware law, including indemnification of expenses such as attorneys’ fees,
judgments, fines and settlement amounts incurred by the director or executive officer in any action or proceeding, including any action
or proceeding by or in right of us, arising out of the person’s services as a director or executive officer.
Policies and Procedures for Related Person
Transactions
Our board has adopted a written related person
transaction policy, which sets forth the policies and procedures for the review and approval or ratification of related person transactions.
This policy covers, with certain exceptions set forth in Item 404 of Regulation S-K under the Securities Act, any transaction, arrangement
or relationship, or any series of similar transactions, arrangements or relationships, in which we were or are to be a participant, where
the amount involved exceeds $120,000 in any fiscal year and a related person had, has or will have a direct or indirect material interest,
including without limitation, purchases of goods or services by or from the related person or entities in which the related person has
a material interest, indebtedness, guarantees of indebtedness and employment by us of a related person. In reviewing and approving any
such transactions, our audit committee is tasked to consider all relevant facts and circumstances, including, but not limited to, whether
the transaction is on terms comparable to those that could be obtained in an arm’s length transaction and the extent of the related
person’s interest in the transaction. All of the transactions described in this section occurred prior to the adoption of this policy.
Item 14. Principal Accountant Fees and Services
The information required by this item with respect
to principal accountant fees and services is to be included in our 2023 Proxy Statement under the section entitled “Principal Accountant
Fees and Services” and the information required by this item with respect to fees and services is to be included in our 2023 Proxy
Statement under the section entitled “Principal Accountant Fees and Services.”
71
Part IV
Item 15. Exhibits and Financial Statements
Schedules
a. (1) Financial Statements:
The financial statements required to be filed
by Item 8 of this Annual Report on Form 10-K and filed in this Item 15, are as follows
Report of Independent Registered Public Accounting Firm (PCAOB #688) F-2
Report of Independent Registered Public Accounting Firm (PCAOB #569) F-3
Statements of Operations for the Years Ended December 31, 2022 and 2021 F-5
Statements of Cash Flows for the Years Ended December 31, 2022 and 2021 F-8
Notes to Financial Statements F-9
(2) Financial Statement Schedules
Schedules are omitted because they are not applicable,
or are not required, or because the information is included in the financial statements and notes thereto.
Exhibit Number Description of Exhibit
72
23.1 Consent of Independent Registered Public Accounting Firm, filed herewith
101.INS Inline XBRL Instance Document.
101.SCH Inline XBRL Taxonomy Extension Schema Document.
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document.
# Indicates management contract or compensatory plan.
73
SIGNATURES
In accordance with Section 13 or 15(d) of the
Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LONGEVERON INC
By: /s/ Mohamed Wa’el Ahmed Hashad
Mohamed Wa’el Ahmed Hashad
Chief Executive Officer
Date: March 14, 2023
SIGNATURES AND POWER OF ATTORNEY
In accordance with the Exchange Act, this report
has been signed below by the following persons on behalf of the registrant and in the capacities indicated and, on the dates, indicated.
Signature Title Date
/s/ Mohamed Wa’el Ahmed Hashasd Chief Executive Officer March 14, 2023
Mohamed Wa’el Ahmed Hashad (principal executive officer)
/s/ James Clavijo Chief Financial Officer March 14, 2023
James Clavijo (principal financial officer and principal accounting officer)
/s/ Joshua M. Hare Director March 14, 2023
Joshua M. Hare
Donald M. Soffer
/s/ Neil E. Hare Director March 14, 2023
Neil E. Hare
/s/ Rock Soffer Director March 14, 2023
Rock Soffer
/s/ Douglas Losordo Director March 14, 2023
Douglas Losordo
Cathy Ross
/s/ Erin Borger Director March 14, 2023
Erin Borger
/s/ Ursula Ungaro Director March 14, 2023
Ursula Ungaro
/s/ Todd C. Girolamo Director March 14, 2023
Todd C. Girolamo
74
LONGEVERON, INC
FINANCIAL STATEMENTS
Table of Contents
Report of Independent Registered Public Accounting Firm (PCAOB #688) F-2
Report of Independent Registered Public Accounting Firm (PCAOB #569) F-3
Statements of Operations for the Years Ended December 31, 2022 and 2021 F-5
Statements of Cash Flows for the Years Ended December 31, 2022 and 2021 F-8
Notes to Financial Statements F-9
F-1