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StageZero Life Sciences Ltd. — Management Reports 2021
Nov 16, 2021
44586_rns_2021-11-15_bdbaad01-2d69-458d-9595-333c35028f0e.pdf
Management Reports
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STAGEZERO LIFE SCIENCES LTD. MANAGEMENT’S DISCUSSION AND ANALYSIS For the nine-month periods ended September 30, 2021 and 2020 [Expressed in US dollars unless otherwise noted]
The following discussion and analysis (“MD&A”) provides management’s perspective on the financial position and results of operations of StageZero Life Sciences Ltd. (“StageZero Life Sciences” or the “Company”) on a consolidated basis for the nine-month periods ended September 30, 2021 and 2020, and it should be read in conjunction with the audited consolidated financial statements for the years ended December 31, 2020 and 2019, which have been prepared by management in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and using the accounting policies described therein. The reporting currency is US dollars (“USD”) unless otherwise specified. The most recent audited consolidated financial statements and annual information form (“AIF”) are available on SEDAR at www.sedar.com and on the StageZero Life Sciences website: www.stagezerolifesciences.com.
The Company’s functional currency is USD.
The audit committee of the board of directors (the “Audit Committee”) and the board of directors (the “Board”) have reviewed and approved the contents of this MD&A, which was current as at November 15, 2021.
The use of “Company” and “StageZero Life Sciences” in all forms refers to StageZero Life Sciences Ltd. and its subsidiaries, unless otherwise noted. The use of “our”, “we” and “us” in this document refers to StageZero Life Sciences or its management. Our registered offices are located in Richmond Hill, Ontario, Canada, near Toronto, and we have the following wholly owned subsidiary companies, StageZero Holdings Inc., which owns 100% of our US subsidiaries, StageZero Life Sciences Inc., Care Oncology Inc. and SZ Physician Holdings, Inc. In addition, Clinics Operations Limited in the UK is owned by StageZero Life Sciences, Ltd.
FORWARD-LOOKING STATEMENTS AND GOING CONCERN UNCERTAINTY
This MD&A contains certain forward-looking statements identified by words such as “believe”, “anticipate”, “estimate”, “expect”, “intend”, “may”, “will”, “would” and similar expressions as well as negative variations thereof, although not all forward-looking statements contain these identifying words. There are a number of risks, uncertainties and other factors that could cause our actual results to differ materially from those indicated or implied by forwardlooking statements. See “Risk Factors”. We cannot guarantee the outcome of plans, intentions or expectations disclosed in forward-looking statements and you should not place undue reliance on these forward-looking statements. Any forward-looking statements represent our estimates at the time such statements are made only, and they should not be relied upon as representing our estimates as at any subsequent date. We do not assume any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Specifically, this MD&A contains forward-looking statements regarding (i) our ability to secure new financing on reasonable terms and continue to operate as a going concern; (ii) the success and profitability and our ability to support the commercialization of our product and in-licensed tests; (iii) the impact of the trading patterns in our share price; (iv) the impact of dilution on existing shareholders given the nature of new financings which we obtain; (v) the impact of regulators’ actions, including the Toronto Stock Exchange and the Ontario Securities Commission on our business; (vi) the success of our collaborations and strategic partnerships to generate sufficient revenue to support our operations; (vii) the demand for our products; (viii) our ability to obtain any necessary regulatory approvals for our products and processes; (ix) the likelihood of Aristotle[®] , ColonSentry[®] or our other products gaining reimbursement by third-party payers, such as private health insurers, managed-health organizations and state-sponsored health insurance plans for each jurisdiction in which our products are offered; (x) our ability to protect our competitive position through patents, trade secrets, trademarks, know-how and other intellectual property rights; (xi) our compliance with privacy laws; (xii) our sales, marketing and distribution strategy; (xiii) our ability to manage corporate growth, commercial expansion and interruptions of operations; (xiv) changes to key personnel; (xv) changes to foreign exchange rates; (xvi) changes in interest rates; (xvii) litigation; (xviii) material weakness in financial
StageZero Life Science, Limited Management’s Discussion & Analysis [Expressed in US dollars, unless otherwise noted]
controls; (xix) fluctuations in quarterly results; (xx) the current enterprise value assigned by the market; and (xxi) general business and economic conditions.
In developing the forward-looking statements in this MD&A, we have applied several material assumptions, including those related to general business and economic conditions as well as our ability to attract new financing on reasonable terms.
As there can be no certainty as to the outcome of the above matters, there is material uncertainty that may cast significant doubt about the Company’s ability to continue as a going concern.
BUSINESS
StageZero Life Sciences is a vertically integrated healthcare company devoted to improving the early detection and management of cancer and other chronic diseases through leading-edge molecular diagnostics and clinical interventions.
On September 2, 2021, the Company acquired 100% of the shares of Clinics Operations Limited (“COL”), a company incorporated in the United Kingdom (“UK”) and, through the Company’s newly incorporated subsidiaries Care Oncology Inc.(“COI”) and Care Oncology Physicians (“COP”), the operating assets of Health Clinics USA Corp., both from Health Clinics Limited (“HCL”), the ultimate parent of both entities
COI and COL (collectively “CareOncology”) offers telemedicine-based clinical services in the USA and the UK through two specific clinical programs, TREAT and AVRT.
StageZero Life Sciences, Inc. is focused on developing and commercializing proprietary molecular diagnostic tests for early detection of diseases and for personalized health management, with an initial focus on cancer-related indications. We have developed a powerful approach to identifying unique RNA-based biomarkers from whole blood. We call this proprietary platform technology the Sentinel Principle®. It has the ability to detect virtually any disease or medical condition from a simple blood sample. The science behind the Sentinel Principle® led to the development of our first commercial product, ColonSentry®, a blood-based test for assessing an individual’s current risk of having colorectal cancer. Our newest program called Aristotle®, also developed using the Sentinel Principle®, is the first mRNA-based multi-cancer detection panel using a single sample of blood and focuses on detecting cancer early, when interventions can often be most effective.
StageZero Life Sciences, through its Sentinel Principle®, is one of the founders of the Liquid Biopsy principle. The Sentinel Principle® is an award-winning technology developed by StageZero Life Sciences based on the scientific observation that circulating blood cells reflect, in a detectable way, what is occurring throughout the body. This is a result of the constant and dynamic interaction of blood with cells, tissues, and organs of the human body. Many clinical studies have demonstrated that gene expression profiles from blood can be used to develop personalized signatures capable of differentiating patients with cancer from healthy patients across a broad spectrum of pathologies. ColonSentry® and Aristotle® specifically measures gene expression in white blood cells. Tumors are known to affect the gene expression profiles of circulating white blood cells. This occurs due to a unique interaction between tumor cells and the immune system that has been referred to as “immunoediting.” Immunoediting is the response of the immune system to a tumor and comprises three stages: elimination (in which the immune system identifies cancerous and/or precancerous cells and attempts to eradicate them), equilibrium (in which the surviving tumor cells begin mutating rapidly), and escape (in which tumor cells proliferate uncontrollably, leading to tumor progression). Each of these stages induces leukocyte gene expression changes that constitute a unique, detectable molecular signature.
We offer early cancer diagnostics and risk stratification via Aristotle, our multi-cancer panel for the diagnosis of multiple discrete cancers from a single sample of blood as well as individual tests for colorectal, prostate and breast cancers, through several novel, proprietary molecular diagnostic platforms at our wholly owned CAP accredited and CLIA certified high-complexity laboratory in Richmond, Virginia. The Company continues to focus our commercialization strategy on the adoption of our proprietary cancer tests with clinical integrated networks, physician groups, employers, and patients. Through CareOncology we are currently integrating Aristotle into the launch of AVRT, a physician-driven interventional program for the early detection of cancer and related inflammatory diseases. Through our CareOncology clinic business, we offer the TREAT program, a physician-driven program for the treatment and management of advanced cancer. See Liquid Biopsy Testing below.
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StageZero Life Science, Limited Management’s Discussion & Analysis [Expressed in US dollars, unless otherwise noted]
The Company has been actively providing COVID-19 testing since April 2020. See COVID Tests below.
With the acquisition and integration of CareOncology, StageZero Life Sciences business expands to include two new program offerings that encompass revenue opportunities beyond diagnostic test processing. The Company is now able to offer a program geared towards early detection (AVRT) and a program geared towards treatment (TREAT).
AVRT is a patient-centric, personalized care plan that specializes in identifying and treating the early warning signs of cancer and other chronic diseases. Created by the physicians and scientists who developed the COC Protocol, AVRT uses similar approaches to detect and target the inflammatory and metabolic pathways that have been demonstrated to increase the risk of developing cancer and other chronic diseases.
TREAT, based on the METRICS Study (NCT02201381)[1] , is a clinically researched and personalized therapeutic regimen administered by experienced oncologists and intended for patients diagnosed with cancer of any type or at any stage, as an adjuvant therapy along with conventional cancer treatment. TREAT employs the patented COC Protocol[2] that intends to interrogate the interconnected intracellular pathways involved in cancer cell growth, proliferation, apoptosis, and angiogenesis, by focusing on metabolic pathways.
1. Agrawal S., Vamadevan P., Maziboku N., Bannister R., Swery R., Wilson S., Edwards S., Front. Pharmacol., 27 June 2019 | https://doi.org/10.3389/fphar.2019.00681
2. Care Oncology Protocol is protected by United States Patent US9622982B2
Liquid Biopsy testing and Clinical Consultation Programs
STAGEZERO LIFE SCIENCES LIQUID BIOPSY TESTING PROGRAMS
Our flagship test, Aristotle, a multi-cancer panel for the detection of multiple discrete cancers from a single sample of blood is being offered within the AVRT program through CareOncology, our clinic business.
Even with the introduction of Aristotle, there remains high interest in cancer tests intended to detect the risk of specific tumor types. ColonSentry[®] , is offered through our wholly owned CAP accredited and CLIA certified high-complexity laboratory in Richmond, Virginia. In addition, we offer early cancer diagnostics and risk stratification for prostate and breast cancers through several novel, proprietary molecular diagnostic platforms.
Aristotle®
Aristotle, the first multiple discrete cancer diagnostic test from a single sample of blood with high specificity and sensitivity. The Female panel test has been validated for ovarian, breast, endometrial, cervical, colorectal, bladder stomach, liver, and nasopharyngeal cancers. The Male panel test has been validated for prostate, colorectal, bladder, stomach, liver, and nasopharyngeal cancers. The ability to facilitate early diagnosis of multiple cancers via an affordable, patient-friendly test will impact management of cancer at the population level in a way that has not been achievable until now. Aristotle is accessed via AVRT, our physician-driven interventional program for the detection of the early risk of cancer .
ColonSentry[®]
The ColonSentry[®] test assesses an individual’s current risk, or probability, of having colorectal cancer through a convenient, and revolutionary, blood test. Colorrectal cancer (“CRC”) is one of the biggest killers in the United States, claiming more than 50,000 lives per year. Although CRC is a preventable and treatable form of cancer when detected early, people often delay or avoid being tested until symptoms appear. Patient discomfort with common test options like colonoscopies or stool-based tests continues to drive high non-compliance with recommended screening guidelines, resulting in late-stage diagnosis of CRC when treatment options are limited, and outcomes are poorer.
The American Cancer Society’s 80-by-18 initiative had a multi-partner goal to improve colorectal cancer screening rates to 80% in the eligible population by the end of 2018. At present, less than 60% of the eligible population has
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StageZero Life Science, Limited Management’s Discussion & Analysis [Expressed in US dollars, unless otherwise noted]
been screened and screening levels have further decreased with the advent of COVID-19 lock-downs. Novel efforts to improve screening through risk stratification tools are essential to getting the ‘unscreened’ population to be screened, traditionally done through colonoscopy (90% of the screened population) or stool-based (10%) procedures. ColonSentry[®] , as a blood-based risk stratification test, helps primary care physicians and gastroenterologists facilitate the discussion about colon cancer screening with the eligible population who have refused to undergo other tests such as colonoscopies or stool-based procedures.
Prostate Health Index (“PHI”)
The PHI test, licensed from Beckman, is a convenient blood test that is three times more specific in detecting prostate cancer than the prostate-specific antigen (“PSA”) test. While the PSA test is currently the most widely used screening test for prostate cancer, it is generally recognized that PSA results can often indicate the possibility of prostate cancer when none is present. The PSA test is based on the fact that men with higher levels of PSA are more likely to have prostate cancer. However, higher levels of PSA can also be caused by a benign enlargement or inflammation of the prostate, leading to many false positives for cancer and ultimately unnecessary, invasive biopsies with an increased potential for patient harm. The PHI test helps physicians distinguish prostate cancer from benign conditions by using three different PSA markers (PSA, free PSA and pro2 PSA) as part of a sophisticated calculation to more reliably determine the probability of cancer in patients with elevated PSA levels.
BreastSentry ™
In October 2014, we in-licensed two blood-based biomarker assays—pro-NT and pro-ENK—intended to aid physicians in identifying those women who are at risk for developing breast cancer. These assays were developed by Sphingotec GmbH, known for the discovery and development of biomarker assays.
BreastSentry™ measures the fasting plasma levels of Neurotensin (pro-NT) and Enkephalin (pro-ENK), which are highly predictive of a woman's risk for developing breast cancer. Various longitudinal studies have shown that elevated levels of pro-NT and decreased levels of pro-ENK are strong, independent risk factors for the development of breast cancer. The combined test levels have been incorporated into a sophisticated algorithm in order to provide an additional level of personal data to create an enriched, personalized score. BreastSentry™ is used to determine a woman’s risk for developing breast cancer relative to the risk in an average risk population.
Breast cancer is the second leading cause of cancer deaths in women in the United States and is exceeded only by lung cancer.
Many breast cancer cases are not due to genetic inheritance and, unlike other blood tests on the market that look for genetic indicators for the possibility of developing breast cancer, pro-NT and pro-ENK are biomarkers that, when measured in a convenient blood test, indicate the current level of a woman’s risk for breast cancer. The tests may be particularly applicable to those 50% of women who have dense breast tissue and where mammograms have less utility. BreastSentry™ has been validated as a laboratory developed test.
COVID-19 Tests
Due to the Company’s extensive knowledge of mRNA testing and its CLIA certified, CAP accredited laboratory, it is uniquely positioned to offer testing for the SARS-CoV-2 virus. Since April 2020, the Company has been offering several types of COVID-19 tests: PCR, antibody and antigen tests. The PCR and antigen tests identify an active infection. The antibody tests identify antibodies in the blood that are indicative of a recent or past infection.
The Company has partnered with both current service providers and new service providers to offer the testing. Our primary tests offered are from Thermo Fisher Scientific, BTNX Inc. and Beckman Coulter.
By utilizing current relationships and in-house expertise that was created for our cancer screening tests, the Company has been able to pivot to serve a substantial need. The path to returning to an ordinary lifestyle relies heavily on vaccines and testing. We are pleased to be able to contribute by offering COVID testing solutions.
Initial interest came from small to large employers, municipalities and health care systems. The Company decided to focus on delivering testing to frontline workers via employers, utilizing our telehealth platform. Our marketing channels for our cancer screening tests focus on Healthcare groups, large employers, physician groups and
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StageZero Life Science, Limited Management’s Discussion & Analysis [Expressed in US dollars, unless otherwise noted]
individuals. The Company is approaching COVID-19 testing in the same way, thereby relying upon established operational efficiencies.
Requests for testing have come from the Mercer VIP Program, the County of Maricopa, Arizona, Udo Test, healthcare systems, national airlines, steel and manufacturing companies as well as Fortune 500 companies, amongst others.
The COVID-19-PCR test is a real-time reverse transcription polymerase chain reaction (rRT-PCR) test for the qualitative detection of nucleic acid from SARS-CoV-2 in nasopharyngeal, anterior nares and saliva specimens from individuals suspected of having COVID-19. Test results indicate whether the patient currently has a COVID-19 infection.
The COVID-19 IgG/IgM Antibody Test is an in-vitro immunoassay for the direct and qualitative detection of antiSARS-CoV-2 IgM and anti-SARS-CoV-2 IgG in human serum, plasma or venipuncture whole blood to aid in the diagnosis of COVID-19 in conjunction with clinical presentation and results of other laboratory tests. Detection of IgM antibodies indicates recent infection, while IgG antibodies gradually appear and increase in the late stage of infection. It is not known how long these antibodies persist in the blood after infection. This test is for professional in-vitro diagnostic use only. Blood samples are drawn from the patient and shipped to our CLIA certified, CAP accredited lab in Richmond, Virginia.
The Company offers a full Respiratory Panel for differentiation of COVID and 20 other pathogens.
CAREONCOLOGY CONSULTATION PROGRAMS
TREAT
The TREAT program is a clinically researched protocol that interrogates the interconnected intracellular pathways involved in cancer cell growth, proliferation, apoptosis, and angiogenesis, by focusing on metabolic pathways. Our patented COC protocol can be used adjuvant to standard of care therapy, or for patients in remission.
The TREAT program is available in the US and the UK via the Company’s CareOncology clinic business.
AVRT
The AVRT program is uniquely designed for early detection of cancer and other chronic diseases. It involves physician consultation and monitoring to identify the early warning signs of cancer, and where necessary, intervening with therapies. The program was created by the physicians and scientists who developed the ground- breaking COC Protocol. AVRT uses a similar approach by identifying and targeting the inflammatory and metabolic pathways that may increase the risk of developing cancer and chronic disease.
A number of tests may be performed as part of the AVRT program, including but not limited to the Company’s Aristotle test. Aristotle was launched in the mid-Atlantic region strategically focused around our Richmond Lab. The Company has developed a strategy to deepen, broaden and expand the AVRT program over the months and years to come.
COMMERCIAL ACTIVITIES
The Company has a clinical reference laboratory specializing in personalized blood-based tests to find, understand and treat cancers, which operates from a single facility in Richmond, Virginia. Also, throughout the COVID pandemic we continue to provide COVID-19 testing. Our laboratory is capable of servicing the entire United States, Canada, and Europe. To broaden our reach the Company has developed, and begun to launch, a Hub and Spoke strategy to facilitate specimen collection and serve a broader population of patients. As a specific strategic initiative that is dependent upon regional collaborations, this initiative is a key focus of management and an essential element to providing patients in the US, Canada and Europe access to our laboratory-developed tests.
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StageZero Life Science, Limited Management’s Discussion & Analysis [Expressed in US dollars, unless otherwise noted]
The Company offers its TREAT program in the US and the UK via its CareOncology clinic business, utilizing its telehealth network. The AVRT program is presently offered in the US and will be expanded into the UK.
With the onset of the COVID-19 pandemic and the change in access to physicians and clinics, most testing switched to COVID, especially PCR-based tests. The Company has secured agreements with a diverse set of customers ranging from small employers with a few hundred employees, to large employers with 50,000+ employees. Additionally, StageZero services multiple healthcare groups as well as diverse groups in the entertainment, hospitality and travel industries. Building upon our experience in establishing these relationships management is focused on leveraging this experience as we integrate CareOncology and deploy Aristotle and AVRT.
The focus is on these Primary Growth Areas:
High-Risk Populations/Self-Funded Employer Plans: Early detection of cancer, as well as risk stratification into normal, high and “raised” risk, is of critical importance to workers exposed to carcinogens. The Company continues to meet with high-risk employer partners with a view to initiating screening within these high-risk groups. We also continue to meet with several self-funded employer plans and have had significant interest in our program.
TeleMedicine - Patient Directed Clinical Consultation and Testing: The global telehealth market was valued at US$62.5 billion in 2020 and some predict it to reach US$475.6 billion by 2026[3] . Currently, 74% of employers in the United States now offer telemedicine as a covered benefit. Americans ages 45-54 and 65+ are most likely to delay needed care due to wait times. On average, it takes approximately twenty-one (21) days for a new patient to see a primary care provider and 66% of consumers are willing to use telehealth to get faster service and cost savings. According to the National Business Group on Health Plan Design Survey, large employers offering telemedicine is increasing.
3 Facts & Factors –Global Telehealth Market, June 29 2021
Flat Fee, Up-front Model: The typical path to commercialization of new, novel diagnostics is often lengthy and involves many steps, with limited uptake and adoption. By offering the StageZero Life Sciences diagnostic testing portfolio to high-risk groups/employers and via telemedicine, we expect to be able to shorten this cycle, thereby driving adoption and increasing utilization of our tests. By contracting with StageZero Life Sciences to provide bloodbased, early cancer risk stratification tests, a patient or employer has access to early-detection technologies and, as a result of our recent acquisition of CareOncology, clinical consultation and monitoring. This provides a unique continuum of care that intends to improve outcomes and reduce overall healthcare costs. StageZero Life Sciences charges for each processed sample/consultation up-front and therefore reduces working capital constraints.
Lab Operations: We had a request in 2018 from a local, known lab to share space with us and we decided to reduce our footprint and consolidate into approximately twenty-five percent of our previous space. With the expansion of testing to accommodate the COVID suite of tests as well as Aristotle, the company now needs this space back. Effective June 30th, 2021 StageZero has reclaimed all of the space and assumed the full lease costs.
FINANCING ACTIVITIES AND CAPITAL STRUCTURE
On September 2, 2021, the Company acquired 100% of the shares of Clinics Operations Limited (“COL”), a company incorporated in the United Kingdom (“UK”) and, through the Company’s newly incorporated subsidiaries Care Oncology Inc.(“COI”) and Care Oncology Physicians (“COP”), the operating assets of Health Clinics USA Corp., both from Health Clinics Limited (“HCL”), the ultimate parent of both entities.
The consideration is comprised of three elements: 12,500,000 shares issued on the date of closing, September 2, 2021; 2,500,000 shares that are issuable upon the successful acquisition of a Care Quality Commission (“CQC”) license by COL (the “CQC Consideration”); and contingent consideration consisting of 8,000,000 common shares, pending approval by the Company’s shareholders, or in the event that that approval is not obtained, then up to Cdn $16 million cash, to be issued or paid as a royalty (9.5% of consolidated revenues). The contingent shares/royalty is only earned if the revenues from TREAT and AVRT reach $4M in any consecutive 12-month period up until December 31, 2022 (the “Earn Out Consideration”). If the revenue target of $4M is not attained in a continuous 12-month period between
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StageZero Life Science, Limited Management’s Discussion & Analysis [Expressed in US dollars, unless otherwise noted]
Sept 2021 and December 31, 2022 then neither the royalty nor the shares are earned. The shares are subject to a Lock Up Agreement that restricts the Holders’ ability to sell those shares, releasing one third on four months from the closing date, one third on eight months and the final third on the anniversary.
A Special Meeting for the approval of the Contingent Shares or the Royalty has been set for December 9, 2021.
On October 21, 2019 the Company announced an agreement with Oncore Pharma to offer StageZero diagnostic tests in Europe. The Company has terminated the Agreement with Oncore Pharma as they did not meet the minimum contracted test volumes and as a result of the COVID-19 global pandemic have ceased operations.
OUTLOOK
At the heart of the Company’s mission to improve health outcomes is our ability to provide physicians and their patients with actionable clinical data for cancer risk assessment and diagnosis. ColonSentry, as the first blood-based, early colorectal cancer diagnostic test to be developed from the Sentinel Principle platform, has been validated in both a 9,000 patient prospective study and a 100,000 patient post-marketing study. This study confirmed the strength of the science. Aristotle, our next-generation diagnostic test, can test for multiple cancers from a single sample of blood, with data to date indicating high sensitivity and specificity across the individual cancers. The Sentinel Principle platform is therefore proven, not promised.
Access to patient friendly, blood-based tests that can detect disease at its earliest stages is truly innovative, especially when multiple disease states can be detected from a single sample of blood. Aristotle does that, in this case, for multiple cancers and will allow early diagnosis at the population health level. This has implications for self-funded employer plans that have employees in high-risk environments (Fire fighters, oil and gas, coal and chemical plants, pilots and flight attendants, drivers), large healthcare systems, especially those with outreach programs and benefit plans, the military, as well as individual States that have specific populations that need to be screened.
As a prelude to this, in 2018 StageZero Life Sciences began the process of collecting and sharing aggregated data in an effort to build a data-driven product to help practices and healthcare systems better understand their patient populations and build more effective programs to improve patient compliance with cancer screening, preventive health programs, and early interventions. We have continued to expand this effort as we initiated research programs with key high-risk groups and focused on supporting these programs into the roll-out of our distinct commercial paths. We expect data as an asset to continue to be a key strategy for us.
In the first three quarters of 2021, we have:
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Announced Letter of Intent to acquire Health Clinics Limited and Health Clinics USA Corp - Oncology Clinics (CareOncology Clinics) for 15 million shares up-front and 8 million contingent/performance shares
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The acquisition brings to StageZero a network of oncologists and primary care physicians operating on a robust telehealth network and dedicated to early disease detection. This complements the Company’s current telehealth platform and provides the infrastructure to launch Aristotle via the AVRT program.
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Health Clinics operates under the trademark of CareOncology and has a proprietary protocol. known as the COC protocol. They have a presence in all 50 US states via a robust telehealth platform. In addition, they have a presence in the United Kingdom.
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Closed the acquisition of CareOncology on September 2, 2021 and integrated the Clinics into StageZero
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Launched Aristotle as part of the AVRT Program
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Launched the AVRT Program in the US
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Expanded testing in Canada via the Company’s partnership with Ichor Blood Services
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Hired further staff and expanded testing capacity, both for COVID-19 and Aristotle®
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Announced the partnership with Rexall to sell COVID 19 saliva test kits on a national basis
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Established partnerships with additional Fortune 500 companies for COVID- 19 testing
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Commenced trading on the OTCQB exchange in the US under the symbol SZLSF
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Appointed Matthew Pietras as CFO & COO
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Strategically designed and began to launch the hub and spoke model
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Established on-Site Clinic in Richmond Lab to offer Aristotle
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StageZero Life Science, Limited Management’s Discussion & Analysis [Expressed in US dollars, unless otherwise noted]
- Broadened strategic relationships for COVID Testing – Rexall
Continuing through the next twelve months, the Company will be focusing on the following:
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Strategic alliances in key geographies for Aristotle deployment
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Broaden relationships with key oncologists and clinics to enhance the reach of CareOncology
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Additional Business Development relationships to deploy more COVID testing
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Research and Development in our CAP accredited and CLIA certified high-complexity lab to broaden/deepen Aristotle
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Broaden the AVRT offering
SIGNIFICANT ACCOUNTING POLICIES
Significant accounting estimates and assumptions
The preparation of consolidated financial statements requires the use of estimates and assumptions to be made in applying the accounting policies that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. We base estimates and related assumptions on previous experience and other factors that we consider reasonable under the circumstances. These form the basis of assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources.
We review estimates and underlying assumptions on an ongoing basis. We recognize revisions to accounting estimates in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.
Significant accounts that require estimates as the basis for determining the stated amounts include share-based compensation, impairment analysis and fair value of warrants, structured notes, convertible debt and conversion liabilities.
FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES
Liquidity risk
Liquidity risk represents the contingency that the Company is unable to gather the funds required with respect to our financial obligations at the appropriate time and under reasonable conditions. The Company attempts to manage this risk to ensure that it always has sufficient liquidity to be able to honor our current and future financial obligations under normal conditions and in exceptional circumstances. Financing strategies to ensure the management of this risk include accessing the capital markets through the issuance of equity or debt securities.
The Company’s ability to continue as a going concern depends upon its ability to achieve profitable operations and raise additional capital. In the past three years, the Company has earned limited revenue. During 2019 and 2020, the Company completed a series of common share, structured notes payable, capital commitment, common share and warrant and convertible debenture financings. The Company expects to continue to pursue further financings as planned or until adequate cash flow from operations occurs.
Credit risk
The Company’s financial assets that are exposed to credit risk consist primarily of cash and cash equivalents and royalty and other receivables. Cash and cash equivalents consist of deposits with major commercial banks and are therefore subject to minimal credit risk.
As at September 30, 2021, the Company had $70,750 accounts receivable associated with COVID-19 test revenue.
Market risk
Market risk is the risk that the fair value or future cash flow of a financial instrument will fluctuate because of changes in market prices. Market risk comprises foreign exchange rate risk and interest rate risk.
Foreign exchange rate risk
The Company operates in Canada and the United States and transacts business primarily with US partners and suppliers. During the 9 months ended September 30, 2021, a 5% appreciation (depreciation) in the Cdn$ to US dollar
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StageZero Life Science, Limited Management’s Discussion & Analysis [Expressed in US dollars, unless otherwise noted]
foreign exchange rate, with all else being equal, would have affected net income by approximately $94,061 [December 31, 2020 – $47,425]. The Company’s exposure to foreign currency changes for all other currencies is not material.
Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The interest rate for the Company’s notes payable to HDL was renegotiated during the first quarter of 2016 and interest began to be accrued at Wall Street Journal Prime Rate plus 4.00% per annum effective April 1, 2016. The notes payable to a shareholder who is also a director, issued after 2017 are fixed at 5% per annum. The convertible debentures are fixed at 6%. Accordingly, there have been no significant impacts on the Company’s consolidated statements of loss and comprehensive loss from changes in interest rates.
The remeasurement of the February 2020 Convertible Debentures requires reassessment of the appropriate discount rate at each reporting period in determining the fair value. That discount rate could fluctuate depending on changes in interest rates as well as changes in the Company’s credit risk. A 2% increase or decrease in the discount rate would have had an immaterial impact on the fair value of the instrument as at June 30, 2021.
COVID-19 Pandemic
In March 2020, the World Health Organization ( “ WHO”) classified the COVID-19 outbreak as a pandemic based on the rapid increase in exposure globally. The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. Management is actively monitoring the global conditions regarding financial impact, liquidity, operations, suppliers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 outbreak at this time.
SELECTED FINANCIAL INFORMATION
The following table sets forth selected financial information for the periods indicated:
| Consolidated statements of financial position | |
|---|---|
Period ended Year ended At September 30, 2021 At December 31, 2020 |
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| (in thousands of dollars) $ $ |
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| Cash 1,592 6,597 |
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| Total current assets 2,677 7,222 |
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| Total non-current assets 7,717 1,285 |
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| Total assets 10,394 8,507 |
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| Total current liabilities 4,722 5,585 |
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| Total non-current liabilities 2,100 4,137 |
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| Total liabilities 6,822 9,741 |
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| Total shareholders’ equity(deficiency) 3,572 (1,233) |
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| Total liabilities and shareholders’ equity(deficiency) 10,394 8,507 |
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StageZero Life Science, Limited Management’s Discussion & Analysis [Expressed in US dollars, unless otherwise noted]
Results of operations for the periods ended September 30, 2021 and 2020
For the three months ended September 30, 2021, we reported a consolidated net loss of $2.2 million, or $0.02 loss per common share, as compared with a consolidated net loss of $2.3 million, or $0.05 loss per common share for the same period in 2020. For the nine months ended September 30, 2021, we reported a consolidated net loss of $5.2 million, or $0.06 loss per common share, as compared with a consolidated net loss of $5.3 million, or $0.08 loss per common share for the same period in 2020.
| Three-month period ended ** Nine-month period ended ** |
||
|---|---|---|
| September 30 September 30 |
||
| 2021 2020 2021 2020 |
||
| (in thousands of US dollars, except per-share amounts) | $ $ $ $ |
|
| Revenue Total revenues Expenses Cost of goods Laboratory costs Research and Development Sales and Marketing General and administrative (Gain) loss from revaluation of warrants Loss/(Gain) from revaluation of Contingent Consideration Change in fair value of convertible debenture Finance costs |
684 1,464 3,566 1,559 |
|
| 684 1,464 3,566 1,559 |
||
| 211 205 749 245 |
||
| 597 769 1,602 1,167 |
||
| 227 - 299 - |
||
| 228 - 1,050 - |
||
| 1,657 1,181 4,665 2,386 |
||
| (792) 230 (1,923) 574 |
||
| (157) - (157) - |
||
| (34) 1,326 1,118 1,625 |
||
| 969 103 1,352 904 |
||
| Total expenses | 2,906 3,814 8,755 6,901 |
|
| Total loss and comprehensive loss, net of tax, for the period |
(2,222) (2,350) (5,189) (5,342) |
|
| Basic and diluted lossper common share | (0.02) (0.05) (0.06) (0.08) |
Results of the third quarter 2021
The results of the Company’s operations yielded a total comprehensive loss for the third quarter 2021 of $2.2 million as compared to a comprehensive loss $2.3 million in 2020, driven by a decrease in revenue of $0.7 million and decrease in cost of goods sold and laboratory costs $0.2 million, a gain of $2.4 million in the fair value of conversion debenture and warrant re-valuation, offset by an increase in finance costs of $0.9 million, an increase of $0.5 million in general and administrative expenses and an increase in research and sales and marketing of $0.5 million.
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StageZero Life Science, Limited Management’s Discussion & Analysis [Expressed in US dollars, unless otherwise noted]
Laboratory costs
| Three months ended September 30 (Decrease) 2021 2020 Increase |
|
|---|---|
| Labor Share-based compensation Overhead |
$ $ $ 275,014 206,206 68,808 2,783 82,926 (80,143) 318,907 479,753 (160,846) |
| Total laboratorycosts | 596,704 768,885 (172,181) |
| Nine months ended September 30 (Decrease) 2021 2020 Increase |
|
|---|---|
| $ $ $ |
|
| Labor Share-based compensation Overhead |
645,374 332,744 312,630 17,103 61,897 (44,794) 939,255 772,064 167,191 |
| Total laboratorycosts | 1,601,731 1,166,705 435,026 |
The decrease in total laboratory costs for the third quarter due to decreased volume of tests processed compared with the same period in 2020. Nine months ended September 30, 2021, compared with the same period in 2020, was mainly due to increased volume of tests processed.
General and Administrative Expenses
| Three months ended September 30 (Decrease) 2021 2020 Increase |
|
|---|---|
| $ $ $ |
|
| Headcount Share-based compensation Public company costs Professional fees Depreciation Foreign exchange loss Other office-related costs |
750,221 419,374 330,847 213,724 128,499 85,225 137,966 127,080 10,886 560,200 576,505 (16,305) 21,656 19,755 1,901 |
| (266,544) (294,177) 27,633 |
|
| 239,539 204,544 34,995 |
|
| Total general and administrative expenses |
1,656,761 1,181,580 475,181 |
| Nine months ended September 30 (Decrease) 2021 2020 Increase |
|
|---|---|
| $ $ $ |
|
| Headcount Share-based compensation |
2,386,775 1,185,463 1,201,312 318,920 677,600 (358,680) |
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StageZero Life Science, Limited Management’s Discussion & Analysis [Expressed in US dollars, unless otherwise noted]
| Public company costs | 429,682 |
388,604 | 41,078 |
|---|---|---|---|
| Professional fees | 1,154,526 |
211,714 | 942,812 |
| Depreciation | 44,149 |
61,530 | (17,381) |
| Foreign exchange loss | (258,770) |
(249,216) | (9,554) |
| Other office-related costs | 589,408 |
110,654 | 478,754 |
| Total general and administrative | 4,664,690 |
2,386,349 | 2,278,341 |
| expenses |
Total general and administrative expenses increased for the three-month period and the nine-month period ended September 30, 2021, compared with the same period in 2020 mainly due to increases in sales commission, professional fees.
Finance costs
Finance costs for the three-month period ended September 30, 2021 were $969,052 as compared with $103,468 in the same period in 2020, an increase primarily attributed to the acquisition activities in the third quarter 2021. On September 2, 2021, the Company acquired 100% of the shares of Clinics Operations Limited (“COL”), a company incorporated in the United Kingdom (“UK”) and, through the Company’s newly incorporated subsidiaries Care Oncology Inc.(“COI”) and Care Oncology Physicians (“COP”), the operating assets of Health Clinics USA Corp.
Finance costs for the three-month period ended September 30, 2021 and 2020 are as follows:
| Three-month period ended Nine-month period ended |
|
|---|---|
| September 30 September 30 |
|
| 2021 2020 2021 2020 |
|
| $ $ $ $ |
|
| Interest on note payable to HDL Interest on note payable to shareholder and director Interest on convertible debenture Interest costs on lease liability Broker warrants relating to convertible debenture financing Transaction costs due to acquisition Transaction costs relating to public offering Transaction costs relatingto issuance of debt |
|
| 33,602 27,051 80,025 81,764 |
|
| 2,502 3,125 7,500 19,144 |
|
| (10,761) 26,488 9,199 82,875 |
|
| 17,889 24,047 58,535 76,170 |
|
| - - - 134,147 |
|
| 925,821 - 1,196,968 - |
|
| - - - - |
|
| - 22,757 - 509,703 |
|
| 969,052 103,468 1,352,226 903,803 |
USE OF PROCEEDS
The Company began the period with $6.6 million in available funds. During the nine-months ended September 30, 2021, $6.1 million of the funding was used in support of operations. During the same period, we received proceeds of $1.3 million from warrant exercises $0.2 million from stock option exercises offset by a $0.09 million payment of principal of the note payable to HDL and $0.2 repayment of lease liability. The Company closed the year with $1.6 million in available funds.
The planned use of proceeds from financings was to continue the expansion of StageZero’s telehealth platform, increase marketing of the telehealth platform, prepare for product launches (notably, Aristotle®), and for general
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StageZero Life Science, Limited Management’s Discussion & Analysis [Expressed in US dollars, unless otherwise noted]
corporate purposes. The COVID-19 pandemic and associated business challenges, as well as the subsequent opportunity to introduce COVID-19 testing, directed the Company to add COVID-19 tests to StageZero’s product line up, to scale up its Richmond Laboratory and to launch COVID-19 testing via StageZero’s existing telehealth system.
EBITDA and Adjusted EBITDA
Earnings before interest, taxes, depreciation, and amortization ( “ EBITDA”) and adjusted earnings before interest, taxes, depreciation, and amortization ( “ Adjusted EBITDA”) are not recognized performance measures under IFRS. EBITDA and Adjusted EBITDA do not have standardized meanings under IFRS and therefore may not be comparable to similar measures presented by other issuers. The term EBITDA consists of net income (loss) and excludes interest, finance costs, taxes, depreciation, and amortization. Adjusted EBITDA also excludes share-based compensation, impairment of assets, revaluation of warrants, changes in fair value of conversion debenture and public entity costs. EBITDA and Adjusted EBITDA are included as supplemental disclosures because Management believes that these disclosures provide a better assessment of the Company ’ s continuing operations by eliminating non-cash costs and costs or gains that are not recurring.
The following is the Adjusted EBITDA and a reconciliation of the Company’s net income (loss) to EBITDA and Adjusted EBITDA for the nine-month period ended September 30, 2021:
STAGEZERO LIFE SCIENCES LTD.
| STAGEZERO LIFE SCIENCES LTD. | ||
|---|---|---|
| Three Months Ended | Nine Months Ended | |
| Adjusted EBITDA | September 30, 2021 | September 30, 2021 |
| (in thousands of dollars) | ||
| Revenue | 684 | 3,566 |
| Material costs | 211 | 749 |
| Gross Margin | 473 | 2,817 |
| Laboratorycosts | 597 | 1,602 |
| Grossprofit | (124) | 1,215 |
| Expenses | ||
| Research and development | 228 | 299 |
| Sales and marketing | 228 | 1,050 |
| General and administrative costs | 1,567 | 4,156 |
| Total Expenses | 2,023 | 5,505 |
| Adjusted EBITDA | (2,147) | (4,290) |
| Reconciliation of EBITDA and Adjusted EBITDA | ||
| Net loss and comprehensive loss for period | (2,222) | (5,189) |
| Interest | 45 | 157 |
| Finance costs | 926 | 1,197 |
| EBITDA | (1,251) | (3,835) |
| Public entity costs | 137 | 430 |
| Stock-based compensation | 216 | 336 |
| Revaluation of warrants | (791) | (1,923) |
| Revaluation of Contingent Consideration | (157) | (157) |
| Change in fair value of convertible debenture | (34) | 1,118 |
| Foreign exchange | (267) | (259) |
| Non-cash charges | (896) | (455) |
| Adjusted EBITDA | (2,147) | (4,290) |
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StageZero Life Science, Limited Management’s Discussion & Analysis [Expressed in US dollars, unless otherwise noted]
LIQUIDITY AND CAPITAL RESOURCES
Adequacy of financial resources
The Company has earned limited revenue. The Company has been able to raise planned funds through private placements or other methods of financing, which have contributed to the Company’s current financial situation where it has adequate cash resources. COVID-19 has contributed to the financial status of the Company inasmuch as it is providing a steady revenue source from COVID-19 testing. Further details of financings completed, and challenges addressed from 2019 to 2021 are discussed in the notes to the financial statements for the nine-month periods ended September 30, 2021 and 2020.
There can be no assurance that additional funding will be available on acceptable terms or at all, when and if required. If adequate funds are not available when required, the Company may have to substantially reduce or eliminate planned expenditures or delay programs designed to expand its commercial business. As there can be no certainty as to the resolution of the above matters, there is material uncertainty that may cast significant doubt about the Company’s ability to continue as a going concern. – see FORWARD LOOKING STATEMENTS AND GOING CONCERN UNCERTAINTY (Page 2)
On January 24, 2020, the Company issued 2,107,526 units for gross proceeds of Cdn$674,409 from a private placement. In addition, on February 19, 2020 the Company closed a private placement of convertible debentures (each a “Debenture”) for gross proceeds of Cdn$1,180,000.
As at September 30, 2021, our cash balance was $1.6 million [December 31, 2020 – $6.6 million]. We had working capital deficit $2.0 million [December 31, 2020 – working capital $1.6 million] and a deficit of $109 million [December 31, 2020 – $104 million].
OFF-BALANCE SHEET ARRANGEMENTS
We do not engage in off-balance sheet accounting to structure any of our financial arrangements and do not have any interests in unconsolidated special-purpose or structured finance entities.
CONTRACTUAL OBLIGATIONS
The Company adopted IFRS 16 on January 1, 2019, which requires the recognition of assets and liabilities for all leases, unless the lease term is less than 12 months, or the underlying asset has a low value.
On December 5, 2017, the Company renegotiated the lease of its premises effective January 1, 2018 to September 30, 2023. The property and office space lease bears interest at an estimated rate of 14.4%. The lease liability as at September 30, 2021 is $464,911 (December 31, 2020 – 600,224). Effective August 1, 2018, the Company subleased 74.46% of its leased space for a commensurate share of the rental cost for the remaining term of its lease. Effective June 30th, 2021, StageZero has reclaimed all the space and assumed the full lease costs.
RELATED PARTY TRANSACTIONS
Related party transactions are described in Note 10 of the financial statements for the nine-month periods ended September 30, 2021 and 2020.
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StageZero Life Science, Limited Management’s Discussion & Analysis
[Expressed in US dollars, unless otherwise noted]
SELECTED QUARTERLY FINANCIAL DATA
Selected quarterly financial data for our last eight fiscal quarters follows:
| in thousands of dollars, except per- share amounts |
2021 | 2020 | 2019 as re-stated |
|||||
|---|---|---|---|---|---|---|---|---|
| Q3 | Q2 | Q1 | Q4 | Q3 | Q2 (amended) |
Q1 (amended) | Q4 | |
| Revenues Net gain (loss) Basic and diluted loss per common share |
684 (2,222) (0.02) |
405 4,330 0.05 |
2,477 (7,296) (0.08) |
2,593 | 1,464 | 63 | 31 | 50 |
| (1,522) | (2,350) | (274) | (2,436) | 613 | ||||
| (0.02) | (0.05) | (0.00) | (0.07) | 0.02 |
RESPONSIBILITIES, CONTROLS AND POLICIES
Management’s responsibility for financial reporting
Evaluation of disclosure controls and procedures
Our Chairman and CEO and the Chief Financial Officer are responsible for establishing and maintaining disclosure controls and procedures for the Company. As such, we maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed in filings is recorded, processed, summarized, and reported within the time periods specified by the Canadian Securities Administrators rules and forms. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Our Chairman and CEO, and Chief Financial Officer have evaluated our disclosure controls and procedures as at September 30, 2021 and have concluded that disclosure controls and procedures are effective.
Management’s report on internal controls over financial reporting
Our Chairman and CEO, and Chief Financial Officer are responsible for establishing and maintaining effective internal controls over financial reporting. Our internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. Because of their inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Our Chairman and Chief Executive Officer, and Chief Financial Officer evaluated the effectiveness of our internal controls over financial reporting as at September 30, 2021 and identified the material weakness outlined below.
Material weakness
The material weaknesses we identified in our internal controls over financial reporting at September 30, 2021 were as follows: We did not have sufficient accounting resources with relevant technical accounting skills to address issues
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StageZero Life Science, Limited Management’s Discussion & Analysis [Expressed in US dollars, unless otherwise noted]
related to the financial statement close process. Because of the size of the Company and its staff complement, we were not able to sufficiently design internal controls to provide the appropriate level of oversight regarding the financial recordkeeping and review of the Company’s financial reporting. This weakness will continue to be addressed through 2021. See “Changes in Internal Controls Over Financial Reporting” below.
In making this assessment, management used the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework (2013).
Consistent with our stage of development, we continue to rely on risk-mitigating procedures during our financial closing process in order to provide comfort that the financial statements are presented fairly in accordance with IFRS.
Changes in internal controls over financial reporting
Our Chairman and Chief Executive Officer, and Chief Financial Officer have evaluated whether there were changes to our internal controls over financial reporting during the period ended September 30, 2021 that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting. No such changes were identified through evaluation of the Company. As the Company continues to improve its internal controls over financial reporting, we have engaged outside consultants, expert in the valuation of complex financial instruments and have begun monthly reviews of the Company’s detailed accounting records, and quarterly on-site reviews of processes in place at the Company. In light of the remediation occurring, our internal controls are expected to be changed, but only once the planned changes are finalized.
RISKS AND UNCERTAINTIES
The information presented in the “ Financial Instruments and Financial Risk Management Objectives and Policies” section presented on pages 9 to 12 and under the heading “ Risk Factors” on pages 36 to 47 of our Annual Information Form for the year ended December 31, 2020 has not changed materially since December 31, 2020.
Additional information relating to StageZero Life Sciences can be found on SEDAR at www.sedar.com or on our website at www.stagezerolifesciences.com.
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