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AGEX THERAPEUTICS INC

(AGE)
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AGEX THERAPEUTICS : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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08/14/2019 | 05:18pm EDT
The matters addressed in this Item 2 that are not historical information
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, including statements about any of the following: any projections of
earnings, revenue, cash, effective tax rate, use of net operating losses, or any
other financial items; the plans, strategies and objectives of management for
future operations or prospects for achieving such plans, and any statements of
assumptions underlying any of the foregoing. Any statements contained herein
that are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "believes," "anticipates,"
"plans," "expects," "seeks," "estimates," and similar expressions are intended
to identify forward-looking statements. While AgeX may elect to update
forward-looking statements in the future, it specifically disclaims any
obligation to do so, even if the AgeX estimates change and readers should not
rely on those forward-looking statements as representing AgeX views as of any
date subsequent to the date of the filing of this Quarterly Report. Although we
believe that the expectations reflected in these forward-looking statements are
reasonable, such statements are inherently subject to risks and AgeX can give no
assurances that its expectations will prove to be correct. Actual results could
differ materially from those described in this report because of numerous
factors, many of which are beyond the control of AgeX. A number of important
factors could cause the results of the company to differ materially from those
indicated by such forward-looking statements, including those detailed under the
heading "Risk Factors" in this Form 10-Q, our Form 10-K for the year ended
December 31, 2018, and our other reports filed with the SEC from time to time.



The following discussion should be read in conjunction with AgeX's condensed interim financial statements and the related notes provided under "Item 1- Financial Statements" above.




Critical Accounting Policies



This Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses and analyzes data in our unaudited condensed consolidated
interim financial statements, which we have prepared in accordance with U.S.
generally accepted accounting principles. Preparation of the financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue and expenses, and related
disclosure of contingent assets and liabilities. Management bases its estimates
on historical experience and on various other assumptions that it believes to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Senior management has discussed the
development, selection and disclosure of these estimates with the Audit
Committee of our Board of Directors. Actual conditions may differ from our
assumptions and actual results may differ from our estimates.



An accounting policy is deemed critical if it requires an accounting estimate to
be made based on assumptions about matters that are highly uncertain at the time
the estimate is made, if different estimates reasonably could have been used, or
if changes in the estimate are reasonably likely to occur, that could materially
impact the financial statements. Management believes that there have been no
significant changes during the six months ended June 30, 2019 to the items that
we disclosed as our critical accounting policies and estimates in Management's
Discussion and Analysis of Financial Condition and Results of Operations in our
Annual Report on Form 10-K for the year ended December 31, 2018, except as
disclosed in Note 2 of our condensed consolidated interim financial statements
included elsewhere in this Report.



Results of Operations


Comparison of Three and Six Months Ended June 30, 2019 and 2018



Revenues and Cost of Sales


The amounts in the table below show our consolidated revenues by source and cost of sales for the periods presented (in thousands).



                                             Three Months Ended
                                            June 30, (unaudited)           $ Increase/       % Increase/
                                           2019              2018          (Decrease)        (Decrease)
Subscription and advertising revenues   $       305$       333     $
        (28 )            (8.4 )%
Grant revenues                                   47                 -                47                 * %
Other                                            28               131              (103 )           (78.6 )%
Total revenues                                  380               464               (84 )           (18.1 )%
Cost of sales                                   (53 )             (79 )             (26 )           (32.9 )%
Gross profit                            $       327$       385     $         (58 )           (15.1 )%




22







                                              Six Months Ended
                                            June 30, (unaudited)           $ Increase/       % Increase/
                                           2019              2018          (Decrease)        (Decrease)
Subscription and advertising revenues   $       650$       572     $          78              13.6 %
Grant and other revenues                         62                 -      
         62                 * %
Other                                            56               131               (75 )           (57.3 )%
Total revenues                                  768               703                65               9.2 %
Cost of sales                                  (116 )            (188 )             (72 )           (38.3 )%
Gross profit                            $       652$       515     $         137              26.6 %




* Not meaningful.


Our revenues were primarily generated by LifeMap Sciences, as subscription and
advertising revenues from its GeneCards® online database. Subscription and
advertising revenues amounted to $305,000 and $333,000 for the three months
ended June 30, 2019 and 2018, respectively, and $650,000 and $572,000 for the
six months ended June 30, 2019 and 2018, respectively, remaining relatively
unchanged from the prior periods.



During the three and six months ended June 30, 2019, we recognized income of
approximately $47,000 and $62,000 from a grant from the NIH. We had no grant
revenue during the three and six months ended June 30, 2018. Other revenues of
$131,000 for the three and six months ended June 30, 2018 were generated
entirely from non-recurring service revenues associated with LifeMap Sciences'
online database business primarily related to its GeneCards® database.



Cost of sales for the three and six months ended June 30, 2019 as compared to
the same period in 2018 decreased primarily due to decreased royalty payments
made or incurred by LifeMap Sciences due to a change in the applicable royalty
fee terms from a percentage of net collections from customers to a fixed annual
fee effective January 1, 2019.



Operating Expenses


The following table shows our consolidated operating expenses for the periods presented (in thousands).



                                           Three Months Ended
                                          June 30, (unaudited)          $ Increase/       % Increase/
                                         2019              2018         (Decrease)        (Decrease)
Research and development expenses     $     1,650$    1,384     $         266              19.2 %
General and administrative expenses         2,119            1,135         
     984              86.7 %




                                         Six Months Ended
                                       June 30, (unaudited)          $ Increase/       % Increase/
                                      2019              2018         (Decrease)        (Decrease)
Research and development
expenses                           $     2,988$    2,975     $          13               0.4 %
Acquired in-process research and
development                                  -              800              (800 )               * %
General and administrative
expenses                                 4,228            2,425             1,803              74.4 %




* Not meaningful.


Research and development expenses

Research and development expenses increased by $0.3 million to $1.7 million during the three months ended June 30, 2019 from $1.4 million during the same period in 2018. The increase was primarily attributable to an increase in expenses in our programs utilizing PureStem® cell lines and iTR technology.




Research and development expenses and acquired in-process research and
development ("IPR&D") decreased by $0.8 million to $3.0 million during the six
months ended June 30, 2019 from $3.8 million during the same period in 2018. The
decrease was primarily attributable to the non-recurrence of in-process research
and development expense that was incurred during March 2018 in connection with
the purchase of certain assets primarily related to stem cell derived
cardiomyocytes (heart muscle cells) to be developed by us.



23






The following tables show the amounts and percentages of our total research and
development expenses, including acquired in-process research and development
expenses incurred during 2018, allocated to our primary research and development
programs during the three and six months ended June 30, 2019 and 2018 (amounts
in thousands).



                                                        Three Months Ended June 30, (unaudited)
                                                        Amount (1)                  Percent of Total
Company             Program                        2019             2018           2019          2018
AgeX including      PureStem® progenitor cell
ReCyte              lines, brown adipose fat,
Therapeutics,       iTR technology, and
Inc. (2)            pre-clinical
                    cardiovascular therapy
                    research and development    $    1,284$      967           77.8 %       69.9 %

LifeMap Sciences    Biomedical, gene, and
                    disease databases and
                    tools                              366              417           22.2 %       30.1 %
Total research
and development
expenses and
acquired IPR&D                                  $    1,650$    1,384          100.0 %      100.0 %




                                                        Six Months Ended June 30, (unaudited)
                                                        Amount (1)                 Percent of Total
Company             Program                        2019             2018          2019          2018
AgeX including      PureStem® progenitor cell
ReCyte              lines, brown adipose fat,
Therapeutics,       iTR technology, and
Inc. (3)            pre-clinical
                    cardiovascular therapy
                    research and development    $    2,253$    2,179          75.4 %       57.7 %

AgeX                Acquired in-process
                    research and development             -              800             * %       21.2 %

LifeMap Sciences Biomedical, gene, and

                    disease databases and
                    tools                              735              796          24.6 %       21.1 %
Total research
and development
expenses and
acquired IPR&D                                  $    2,988$    3,775         100.0 %      100.0 %




* Not meaningful.


(1) Amount includes research and development expenses incurred both directly by

us or the named subsidiary. Amount also includes indirect expenses allocated

from BioTime for certain general research and development expenses, such as

lab supplies, lab expenses, rent and insurance allocated to research and

development expenses, incurred directly by BioTime on behalf of AgeX or a

subsidiary. See Notes 2 and 4 to our condensed consolidated interim financial

    statements included elsewhere in this Report.



(2) Includes approximately $4,000 and $39,000 of ReCyte Therapeutics expenses for

    the three months ended June 30, 2019 and 2018, respectively.



(3) Includes approximately $23,000 and $68,000 of ReCyte Therapeutics expenses

    for the six months ended June 30, 2019 and 2018, respectively.



General and administrative expenses

The following tables show the amount of general and administrative expenses of
AgeX and named subsidiaries during the three and six months ended June 30,
2019
and 2018 (in thousands):



                                              Three Months Ended June 30, (unaudited)
                                            Amount (1)                     Percent of Total
Company                               2019              2018             2019            2018
AgeX including ReCyte
Therapeutics                       $     1,892$       962             89.3 %         84.8 %
LifeMap Sciences                           227               173             10.7 %         15.2 %
Total general and administrative
expenses                           $     2,119$     1,135            100.0 %        100.0 %




24







                                              Six Months Ended June 30, (unaudited)
                                            Amount (1)                    Percent of Total
Company                               2019              2018            2019            2018
AgeX including ReCyte
Therapeutics                       $     3,783$     2,044            89.5 %         84.3 %
LifeMap Sciences                           445               381            10.5 %         15.7 %
Total general and administrative
expenses                           $     4,228$     2,425           100.0 %        100.0 %



(1) Amount includes direct expenses incurred by us or the named subsidiary.

Amount also includes indirect general and administrative expenses allocated

by BioTime to us under the Shared Facilities Agreement. See Notes 2 and 4 to

our condensed consolidated interim financial statements included in this

    Report.




General and administrative expenses for the three months ended June 30, 2019
increased by $1.0 million to $2.1 million as compared to $1.1 million during the
same period in 2018. This increase was primarily attributable to the following
increases in expenses: $0.3 million of noncash stock-based compensation expense;
$0.2 million in insurance premiums; $0.3 million in professional fees for
consulting, legal and accounting services; and $0.2 million in personnel and
related costs.


General and administrative expenses for the six months ended June 30, 2019
increased by $1.8 million to $4.2 million as compared to $2.4 million during the
same period in 2018. This increase was primarily attributable to the following
increases in expenses: $0.6 million of noncash stock-based compensation expense;
$0.4 million in insurance premiums; $0.4 million in professional fees for
consulting, legal and accounting services; and $0.4 million in personnel and
related costs.



Other income (expense), net



Other income and expenses, net, in 2019 and 2018 consist primarily of net
foreign currency transaction gains and losses recognized by LifeMap Sciences for
intercompany payables and receivables denominated in currency other than the
functional currency of the entity, gain on disposition of assets, and interest
income and interest expense, net.



Gain on sale of equity method investment in Ascendance

On March 23, 2018, Ascendance Biotechnology, Inc. ("Ascendance"), a company in
which we held shares of common stock accounted for on the equity method, was
acquired by a third party in a merger and we received $3.2 million in cash for
our Ascendance common stock. We recognized a gain on sale for the same amount
included in other income and expenses, net, during the six months ended June 30,
2018. We recognized an additional $277,000 on sale of our Ascendance common
stock for the three and six months ended June 30, 2019, when we received a final
payment for our Ascendance common stock in June 2019.



Income taxes



For Federal and California purposes, our activity for the three and six months
ended June 30, 2018 was included in BioTime's federal consolidated and
California combined tax returns. For the three and six months ended June 30,
2019, the provision for income taxes has been presented on a separate federal
consolidated tax return and a California combined tax return using the separate
return method as we will file separately from BioTime for periods after August
30, 2018, the date in which BioTime deconsolidated AgeX as discussed in Note 7
to our condensed consolidated interim financial statements included elsewhere in
this Report.



Beginning in 2018, the 2017 Tax Act subjects a U.S. stockholder to tax on Global
Intangible Low Tax Income "GILTI" earned by certain foreign subsidiaries. In
general, GILTI is the excess of a U.S. shareholder's total net foreign income
over a deemed return on tangible assets. The provision further allows a
deduction of 50% of GILTI, however this deduction is limited to the company's
pre-GILTI U.S. income. For the year ended December 31, 2018, we included an
immaterial amount of GILTI in U.S. gross income related to LifeMap Sciences,
Ltd., which was fully offset by current year operating losses. For the three and
six months ended June 30, 2019, our foreign income inclusion was less than the
deemed return on tangible assets, therefore no GILTI was included in income for
the first six months of 2019. Current interpretations under ASC 740 state that
an entity can make an accounting policy election to either recognize deferred
taxes for temporary basis differences expected to reverse as GILTI in future
years or to provide for the tax expense related to GILTI in the year the tax is
incurred as a period expense. We have elected to account for GILTI as a current
period expense when incurred.



For the three and six months ended June 30, 2019, we experienced a domestic loss
from continuing operations but generated foreign income attributable primarily
to foreign currency transaction gains for the current periods. This income was
principally related to the remeasurement of the U.S. dollar denominated
intercompany advances payable by LifeMap Sciences, Ltd. to LifeMap Sciences,
Inc., for which a foreign income tax provision of $76,000 was recorded for the
six months ended June 30, 2019.



25







Due to losses incurred for all periods presented, we did not record a domestic
provision or benefit for income taxes. A valuation allowance will be provided
when it is more likely than not that some portion of the deferred tax assets
will not be realized. We established a full valuation allowance for all domestic
deferred tax assets for the periods presented due to the uncertainty of
realizing future tax benefits from our net operating loss carryforwards and
other deferred tax assets.



Liquidity and Capital Resources

Since inception, we have financed our operations through contributions and
advances from our former parent company, BioTime, the sale of our common stock,
the sale and exercise of warrants, a loan facility by Juvenescence to advance us
funds, and research grants. BioTime has also provided us with the use of BioTime
facilities and services under the Shared Facilities Agreement. Although BioTime
may continue to provide administrative support to us on a reimbursable basis
until September 30, 2019, we do not expect BioTime will provide future
financing. We have incurred operating losses and negative cash flows since
inception and had an accumulated deficit of $80.3 million as of June 30, 2019.
We expect to continue to incur operating losses and negative cash flows.



We expect our expenses to increase in the near term in connection with our
ongoing activities, including costs related to our recent move to a new office
and laboratory facility in Alameda, California under a sublease from a third
party that replaced our use of BioTime's facilities. We will also incur
additional costs of hiring our own internal administrative personnel and ending
our reliance on services provided by BioTime under the terms of the Shared
Facilities Agreement on September 30, 2019 (see Notes 4 and 9 to our
consolidated financial statements included elsewhere in this Report).
Furthermore, now that we are a public company, we will incur additional costs
associated with operating as a public company. In the longer term, we expect our
expenses to increase as we continue our pre-clinical research and development
activities and, if we initiate clinical trials and seek marketing approval for
our product candidates. In addition, if we obtain marketing approval for any of
our product candidates, we expect to incur significant commercialization
expenses related to product sales, marketing, manufacturing and distribution to
the extent that such sales, marketing and distribution are not the
responsibility of potential collaborators. Accordingly, we will need to obtain
substantial additional funding in connection with our continuing operations.



We have made certain adjustments to our operating plans and budgets to reduce
our projected cash expenditures in order to extend the period over which we can
continue our operations with our available cash resources. Some of these
adjustments will entail the deferral of certain work on the development of our
product candidates and technologies, which is likely to delay our progress in
those research and development efforts. Based on our most recent projected cash
flows, we believe that our cash and cash equivalents of $5.8 million as of June
30, 2019, plus the loan facility by Juvenescence to advance us up to $2.0
million for operating capital (discussed in Note 9 to our consolidated financial
statements included elsewhere in this Report), will provide sufficient cash,
cash equivalents, and liquidity to carry out our operations through at least
twelve months from the issuance date of the condensed consolidated interim
financial statements included elsewhere in this Report. However, it is likely
that we will need to raise additional capital in the near term to be able to
meet our operating expenses beyond that twelve-month period. If we are unable to
raise capital when needed or on attractive terms, we would be forced to delay,
reduce or eliminate our research and development programs.



The amount of our future capital requirements will depend on many factors. In the near term these factors will include:

? the scope, progress, results and costs of research and development work on

product candidates;

? the scope, prioritization and number of our research and development programs

we conduct;

? our ability to establish and maintain collaborations on favorable terms, if at

all;

? the costs of preparing, filing and prosecuting patent applications,

maintaining and enforcing our intellectual property rights and defending

intellectual property-related claims;

? the costs of maintaining our laboratory and administrative facilities and

equipment; and

? the cost of employing our own administrative personnel rather than relying on

    services provided by BioTime or Juvenescence.




26
We do not have any committed sources of funds for additional financing, and we
cannot assure that we will be able to raise additional financing on favorable
terms or at all. To the extent that we raise additional capital through the sale
of equity or convertible debt securities, the ownership interest of our present
stockholders will be diluted, and the terms of any securities we issue may
include liquidation or other preferences that adversely affect their rights as
common stockholders. Additional debt financing, if available, may involve
agreements that include covenants limiting or restricting our ability to take
specific actions, such as incurring additional debt, making capital expenditures
or declaring dividends, and may involve the issuance of convertible debt or
stock purchase warrants that would dilute the equity interests of our
stockholders. If we raise funds through additional strategic partnerships or
licensing arrangements with third parties, we may have to relinquish valuable
rights to our technologies, future revenue streams, research programs or product
candidates or to grant licenses on terms that may not be favorable to us.



Cash used in operating activities




During the six months ended June 30, 2019, our total research and development
expenses were $3.0 million and our general and administrative expenditures were
$4.2 million. Net loss attributable to us for the six months ended June 30, 2019
amounted to $6.2 million. Net cash used in operating activities during this
period amounted to $5.4 million. The difference between the net loss
attributable to us and net cash used in operating activities during the six
months ended June 30, 2019 was primarily attributable to the following non-cash
items: $1.0 million in stock-based compensation expense and $0.4 million in
depreciation and amortization. These changes were partially offset by $0.1
million in net loss attributable to noncontrolling interest, $0.3 million we
received for our Ascendance common stock in June 2019, and $0.2 million as a net
use of cash from changes in working capital.



Cash provided by in investing activities




During the six months ended June 30, 2019, net cash provided by investing
activities amounted to $0.1 million, which was attributable to $0.3 million we
received for our Ascendance common stock in June 2019 offset by $0.2 million
payments made for the purchase of equipment, construction in progress and
security deposit for our new office and research facility.



Cash provided by financing activities




During the six months ended June 30, 2019, net cash provided by financing
activities amounted to $4.5 million, which was attributable to proceeds received
from the exercise of warrants to purchase 1,800,000 shares of AgeX common stock
at an exercise price of $2.50 per share.



Off-Balance Sheet Arrangements

As of June 30, 2019 and December 31, 2018, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

© Edgar Online, source Glimpses

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Managers
NameTitle
Michael D. West Chief Executive Officer & Director
Gregory H. Bailey Chairman
Michael H. Mulroy Director
John Francis Mauldin Director
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