Longevity Health Holdings, Inc.: Form 10-Q for the period ended Sep 30, 2024

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the related notes contained in Part I, Item 1 of this Quarterly Report on Form 10-Q (this "Quarterly Report") and our audited consolidated financial statements and the notes thereto, Part I – Item 1A. “Risk Factors” and Part II – Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (the “2023 Annual Report”). Unless the context requires otherwise, references in this Quarterly Report to “Carmell,” the “Company,” “we,” “us,” or “our,” prior to the closing of the Business Combination (as defined in Note 1 to the accompanying unaudited condensed consolidated financial statements), are intended to refer to Carmell Therapeutics Corporation, a Delaware corporation, (“Legacy Carmell”) and, after the closing of the Business Combination, are intended to refer to Carmell Corporation, a Delaware corporation, and its consolidated subsidiaries.

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report includes forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. We have based these forward-looking statements on our current expectations, assumptions and projections about future events. These forward-looking statements involve known and unknown risks and uncertainties that are difficult to predict and could cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases, forward-looking statements can be identified by terminology such as “may,” “should,” “could,” “would,” “expect,” “plan,” “future,” “intend,” “anticipate,” “likely,” “believe,” “estimate,” “continue,” or the negative of such terms or other similar expressions, but the absence of these words does not mean that a statement is not forward-looking. Such forward-looking statements include, but are not limited to, statements and expectations regarding the launch and commercialization of our products, our ability to raise financing in the future, our success in retaining or recruiting key members of our management, the benefits of and our expectations related to the AxoBio Disposition and the Private Placement, market acceptance of our products, regulatory developments related to the cosmetics industry, our ability to compete in our industry, our need to grow the size of our organization in the future and the management of such growth, outcomes related to legal proceedings, as well as all other statements other than statements of historical fact included in this Quarterly Report. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those described in our other filings we make with the U.S. Securities and Exchange Commission (the “SEC”), including those described under the section entitled Part II, Item 1A. “Risk Factors” in this Quarterly Report and under Part I, Item 1A, “Risk Factors” in the 2023 Annual Report. These forward-looking statements represent our estimates and assumptions as of the filing date of this Quarterly Report. We do not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

Overview

Carmell is a bio-aesthetics company that utilizes the Carmell SecretomeTM to support skin and hair health. The Carmell SecretomeTM consists of a potent cocktail of proteins, peptides, and bio-lipids extracted from allogeneic human platelets sourced from U.S. Food and Drug Administration-approved tissue banks. Over the past seven years, Carmell has extensively tested the technology underpinning the Carmell SecretomeTM. Additionally, we have developed a novel microemulsion formulation that enables the delivery of lipophilic and hydrophilic ingredients without relying on the Foul FourteenTM, which are 14 potentially harmful excipients that are commonly used by other companies to impart texture, stability, and other desirable physicochemical attributes to cosmetic products. We are also developing a line of men’s products and a line of topical haircare products. All of our cosmetic skincare and haircare products are tailored to meet the demanding technical requirements of professional care providers and discerning retail consumers. Our product pipeline also includes innovative regenerative bone and tissue healing products that are under development.

We have completed the development of 12 products for our cometic skincare line and began to commercially launch them in 2024. We are employing an omnichannel distribution strategy and are selling our products online through direct e-commerce channels and through retailers in the United States. In addition, we have begun selling our doctor-dispensed products through dermatology and plastic surgery practices and medical aesthetics centers.

Third Quarter Developments

Appointment of Chief Executive Officer

The Board appointed Kendra Bracken-Ferguson as Chief Executive Officer of the Company effective as of July 30, 2024. Ms. Bracken-Ferguson, age 44, is the Founder and Chief Executive Officer of BrainTrust, which encompasses BrainTrust Agency, BrainTrust Founders Studio and BrainTrust Fund 1. She has vast experience in the digital media space and has excelled at developing revenue-generating partnerships in the beauty and wellness industries. Ms. Bracken-Ferguson has served as Chief Executive Officer of BrainTrust Founders Studio since October 2021 and as the Chief Executive Officer of BrainTrust Fund since 2022. She was previously the interim Chief Executive Officer of rē•spin by Halle Berry from April 2020 until October 2021. From May 2019 to April 2020, she was the Chief

Business Officer of Beautycon Media. Ms. Bracken-Ferguson has helped develop more than 200 influencer-driven brands that have collectively generated more than $100 million in revenue. She currently serves on the growth advisory board of Iced Media, and previously served on the board of directors of Cayton Children’s Museum, the board of directors of Influencer Marketing Association and the advisory board of BeautyUnited. Ms. Bracken-Ferguson earned her bachelor’s degree from Purdue University and an MBA from Keller School of Management, Devry University.

In conjunction with Ms. Bracken-Ferguson’s appointment as Chief Executive Officer, Rajiv Shukla resigned from his position as our Chief Executive Officer. Following his resignation, Mr. Shukla continues to serve as Executive Chairman of the Board.

Other 2024 Developments

For information on our material developments during the first half of 2024, are detailed in the accompanying notes to the unaudited condensed consolidated financial statements.

Impact of Macroeconomic Events

Economic uncertainty in various global markets caused by political instability and conflicts, such as the ongoing conflicts in Ukraine and Israel, rising tensions in the Middle East, and economic challenges have led to market disruptions, including significant volatility in commodity prices, credit and capital market instability, and supply chain interruptions, which have caused record inflation globally. Our business, financial condition, and results of operations could be materially and adversely affected by further negative impacts on the global economy and capital markets resulting from these global economic conditions, particularly if such conditions are prolonged or worsen. Although, to date, our results of operations have not been materially impacted by these global economic and geopolitical conditions, it is impossible to predict the extent to which our operations may be impacted in the short and long term. The extent and duration of these market disruptions, whether as a result of the military conflict between Russia and Ukraine, the effects of the Russian sanctions, the conflict between Israel and Hamas, geopolitical tensions, inflation, or otherwise, are impossible to predict. Any such disruptions may also magnify the impact of other risks described or incorporated by reference in Part II, Item 1A. "Risk Factors" in this Quarterly Report and Part I, Item 1A, “Risk Factors” in our 2023 Annual Report.

Critical Accounting Policies and Estimates

This discussion and analysis of our financial condition and results of operations is based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements, as well as the reported revenue expenses and net loss incurred during the reporting periods. Our estimates are based on our historical experience 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 value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Going Concern and Management Plan

The unaudited condensed consolidated financial statements included elsewhere herein were prepared under the assumption that we would continue our operations as a going concern, which contemplates the realization of assets and the satisfaction of liabilities during the normal course of business. However, as of September 30, 2024, we had cash of $1,137,325, an accumulated deficit of $67,957,379 and liabilities of $6,506,411. We have incurred substantial recurring losses from continuing operations, have used, rather than provided, cash from our continuing operations and are dependent on additional financing to fund future operations. These conditions raise substantial doubt about our ability to continue as a going concern within one year after the date the financial statements are issued. The unaudited condensed consolidated financial statements included elsewhere herein do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

We closed on the Private Placement in April 2024 and received gross proceeds of $3,001,235. Furthermore, we have refocused our efforts on cosmetic skincare products with near-term commercial potential, reprioritized further research and development, and ceased clinical studies of product candidates that will take more than a year to commercialize. We are also exploring raising additional capital, the development and commercialization of haircare products based on the Carmell SecretomeTM, and the out-licensing of certain research and development programs to generate non-dilutive liquidity. Collectively, these activities are anticipated to assist us in extending our cash runway.

Comparison of Results of Operations for the Three Months Ended September 30, 2024 and 2023

The following table sets forth our unaudited consolidated results of operations for the three months ended September 30, 2024 and 2023:

Revenue/Gross Profit

Gross revenue for the three months ended September 30, 2024 was $58,915 from sales of our first five cosmetic skincare products launched in 2024. We have developed an additional seven cosmetic skincare products that we expect to launch over the next six months. Discounts and allowances related to these sales totaled $38,396 for the three months ended September 30, 2024. Our net revenue, cost of goods sold, and gross profit on these sales were $20,519, $4,840 and $15,679, respectively.

Operating Expenses

Selling and marketing expenses totaled $120,062 for the three months ended September 30, 2024 and were driven by our marketing efforts related to our first five cosmetic skincare products launched in 2024.

Research and development expenses decreased by $1,259,093 to $331,806 in the third quarter of 2024 as compared to the same period of 2023. This decrease was driven by our strategic realignment, which refocused our efforts on cosmetic skincare products with near-term commercial potential, reprioritized further research and development, and ceased clinical studies of product candidates that would take more than a year to commercialize. Also contributing to the decrease was the termination of employees in non-core or overlapping business areas in the third quarter of 2023 and the first quarter of 2024.

General and administrative expenses were $965,622 and $507,948 for the three months ended September 30, 2024 and 2023, respectively. This increase was primarily driven by an increase in insurance costs and salaries and benefits for personnel.

Restructuring charges of $726,280 for the three months ended September 30, 2023 were related to the post-acquisition integration of AxoBio and consisted primarily of accrued severance from the termination of certain executives serving as part-time consultants and full-time employees in non-core areas or overlapping business functions.

Other Expenses, Net

Other expenses, net, were $1,458,692 for the three months ended September 30, 2024, as compared to $6,210,360 in the corresponding period of 2023. Other expenses, net, for the third quarter of 2024 were driven by an unfavorable change in the fair value of the Forward Purchase Agreement of $1,420,137. The corresponding period of 2023 reflects an unfavorable change in the fair value of the Forward Purchase Agreement of $10,592,442 and interest expense of $314,124. Such expenses were partially offset by a favorable change in the fair value of derivative liabilities related to the Convertible Notes totaling $4,697,138.

Comparison of Results of Operations for the Nine Months Ended September 30, 2024 and 2023

The following table sets forth our unaudited consolidated results of operations for the nine months ended September 30, 2024 and 2023:

Revenue/Gross Profit

Gross revenue for the nine months ended September 30, 2024 was $71,235 from sales of our first five cosmetic skincare products launched in 2024. We have developed an additional seven cosmetic skincare products that we expect to launch over the next six months. Discounts and allowances related to these sales totaled $38,396 for the nine months ended September 30, 2024. Our net revenue, cost of goods sold, and gross profit on these sales were $32,839, $5,132 and $27,707, respectively.

Operating Expenses

Selling and marketing expenses totaled $131,107 for the nine months ended September 30, 2024 and were driven by the costs related to our marketing efforts for the launch of our cosmetic skincare products in 2024.

Research and development expenses decreased by $2,289,589 to $865,292 in the first nine months of 2024 as compared to the same period of 2023. This decrease was driven by our strategic realignment, which refocused our efforts on cosmetic skincare products with near-term commercial potential, reprioritized further research and development, and ceased clinical studies of product candidates that would take more than a year to commercialize. Also contributing to the decrease was the termination of employees in non-core or overlapping business areas in the third quarter of 2023 and the first quarter of 2024.

General and administrative expenses were $2,957,890 and $1,655,846 for the nine months ended September 30, 2024 and 2023, respectively. This increase was primarily driven by an increase in insurance costs and salaries and benefits for personnel.

Restructuring charges of $726,280 for the nine months ended September 30, 2023 were related to the post-acquisition integration of AxoBio and consist primarily of accrued severance from the termination of certain executives serving as part-time consultants and full-time employees in non-core areas or overlapping business functions.

Other Expenses, Net

Other expenses, net, were $5,744,560 for the nine months ended September 30, 2024, as compared to $10,585,772 in the corresponding period of 2023. For the nine months ended September 30, 2024, other expenses, net, were driven by an unfavorable change in the fair value of the Forward Purchase Agreement of $5,700,451. The same period of 2023 includes an unfavorable change in the fair value of the Forward Purchase Agreement of $10,592,442 and interest expense on debt of $845,158. These expenses were partially offset by a favorable change in the fair value of derivative liabilities related to the Convertible Notes of $826,980.

Discontinued Operations, Net

We had a loss from discontinued operations of $1,252,276, net of tax, for the nine months ended September 30, 2024, which reflects the results of the AxoBio business through the closing of the AxoBio Disposition on March 26, 2024. There were no sales of AxoBio’s products from October 2023 through the closing date of the AxoBio Disposition. The Company recognized a non-cash gain on the sale of AxoBio of $1,534,479 during the nine months ended September 30, 2024, due principally to the change in the fair value of the stock consideration between the AxoBio Acquisition and the AxoBio Disposition. See Note 1 to the accompanying unaudited condensed consolidated financial statements.

Liquidity, Capital Resources, and Going Concern

As of September 30, 2024, we had cash of $1,137,325, an accumulated deficit of $67,957,379, and liabilities of $6,506,411. In addition, we had a net loss from continuing operations of $9,736,181 and negative cash flows from operations of $3,616,885 for the nine months ended September 30, 2024. Since our inception, we have financed operations principally through our issuances of equity securities and debt financing. In addition to the cost savings from the elimination of non-core areas or overlapping business functions in both the third quarter of 2023 and the first quarter of 2024 and the reduction of expenses resulting from the AxoBio Disposition, we have refocused our efforts on cosmetic skincare products with near-term commercial potential, reprioritized further research and development, and ceased clinical studies of product candidates that would take more than a year to commercialize.

Late in the second quarter of 2024, we began the launch of our cosmetic skincare products based on the Carmell Secretome™. Management anticipates that revenue from the commercialization of its cosmetic skincare products and the anticipated cost savings from the activities detailed above will assist us in extending our cash runway. In addition, we are exploring raising additional capital, the development and commercialization of haircare products based on the Carmell Secretome™, and the out-licensing of certain research and development programs to enhance our liquidity.

However, the cash available to us may not be sufficient to allow us to operate for the next 12 months due to our current and potential liabilities. We may need to raise additional capital through equity or debt issuances. If we are unable to raise additional capital, we may be required to take additional measures to conserve liquidity, which could include, but not necessarily be limited to, curtailing operations and reducing overhead expenses. We cannot provide any assurance that new financing will be available on commercially acceptable terms, if at all, or will be completed on a timely basis. These conditions raise substantial doubt about our ability to continue as a going concern.

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with GAAP, which contemplates the continuation of the Company as a going concern, the realization of assets, and the satisfaction of liabilities in the normal course of business. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty or that may be necessary should we be unable to continue as a going concern.

Debt

As of September 30, 2024, we had outstanding debt totaling $362,967 (see Note 9 to the accompanying unaudited condensed consolidated financial statements). In the first quarter of 2024, the Board elected to repay all of the maturing Promissory Notes in shares of the Company’s Common Stock in accordance with the terms of the Promissory Notes. During the nine months ended September 30, 2024, all of the Promissory Notes with an aggregate principal amount of $848,500 were repaid through the issuance of an aggregate of 328,707 shares of Common Stock. In addition, the Holders of the Convertible Notes have demanded additional payment of principal and interest on the Convertible Notes and certain payments with respect to the Convertible Note Warrants, as more fully described in Note 10 to the accompanying unaudited condensed consolidated financial statements.

Cash Flows

The following table summarizes our unaudited consolidated cash flows for the nine months ended September 30, 2024 and 2023:

Operating Activities

Net cash used in operating activities for the nine months ended September 30, 2024 decreased by $1,320,125 as compared to the same period of 2023. This decrease was primarily driven by the cost reductions discussed above.

Investing Activities

For the nine months ended September 30, 2024, we paid $748,796 of costs in connection with the AxoBio Disposition.

Financing Activities

Net cash provided by financing activities was $2,590,545 for the nine months ended September 30, 2024, as compared to $11,935,234 for the nine months ended September 30, 2023. In the nine months ended September 30, 2024, we closed the Private Placement, which provided net proceeds of $2,687,225. Financing activities in the same period of 2023 were driven by the proceeds of $30,951,174 from the Business Combination and $1,859,980 in proceeds from the issuance of debt and warrants, partially offset by the cash transferred in connection with the Forward Purchase Agreement of $17,535,632. In the 2023 period, we repaid $2,649,874 to the Holders of the Convertible Notes upon the closing of the Business Combination.

Contingencies

On November 8, 2023, Puritan filed a complaint captioned Puritan Partners LLC v. Carmell Regen Med Corporation et al., No. 655566/2023 (New York Supreme Court, New York County) naming the Company as defendant. In the complaint, Puritan asserts that the Company breached its obligations under the Convertible Notes and the Convertible Note Warrants. Puritan also asserts the Company did not comply with its obligations to provide Puritan with 25,000 freely tradeable shares of Common Stock on a timely basis. Puritan asserts claims for declaratory judgment, breach of contract, conversion, foreclosure of its security interest, replevin, unjust enrichment, and indemnification, and seeks remedies including damages totaling $2,725,000 through November 1, 2023, additional fees and interest thereafter, costs and attorney’s fees, an order of foreclosure on its security interest, and other declaratory relief. The Company has moved to dismiss the complaint and intends to defend itself vigorously against this litigation.

Contractual Obligations and Commitments

In addition to financing obligations under our debt agreements, our contractual and commercial commitments include expenditures for operating leases and royalty payments. For further information on our Amended License Agreement with CMU, see Note 10 to the accompanying unaudited condensed consolidated financial statements.

Emerging Growth Company and Smaller Reporting Company Status

The JOBS Act permits an “emerging growth company” to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. Although we qualify as an emerging growth company, we have elected not to “opt-out” of this provision and, as a result, we will adopt new or revised accounting standards at the time private companies adopt the new or revised accounting standard and will do so until such time that we either (i) irrevocably elect to “opt-out” of such extended transition period or (ii) no longer qualify as an emerging growth company.

We are also a “smaller reporting company,” meaning that the market value of our stock held by non-affiliates is less than $700 million, and our annual revenue was less than $100 million during the most recently completed fiscal year. We may continue to be a smaller reporting company if either (i) the market value of our stock held by non-affiliates is less than $250 million or (ii) our annual revenue was less than $100 million during the most recently completed fiscal year, and the market value of our stock held by non-affiliates is less than $700 million. If we are a smaller reporting company at the time that we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company, we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Evaluation of Disclosure Controls and Procedures

As required by Rules 13a-15 and 15d-15 under the Exchange Act, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures as of September 30, 2024. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of such date due to the issue described below.

Changes in Internal Control Over Financial Reporting

Management identified a material weakness in its internal controls over the accounting treatment for a complex transaction during the second quarter of 2024. We have addressed this weakness by adopting a policy requiring formal documentation to substantiate the accounting treatment of all material transactions, including references to the relevant authoritative guidance.

There have been no material changes from the risk factors disclosed under “Risk Factors” in Part I, Item 1A of our 2023 Annual Report. The risks and uncertainties described in our 2023 Annual Report are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also materially adversely affect our business, financial condition or results of operations.