UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________ to ________
Commission
file number
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
| (Address of principal executive offices) (Zip code) |
(Registrant’s
telephone number, including area code) (
Securities registered pursuant to Section 12(b) of the Act
| Title of each class | Trading Symbol | Name of exchange on which registered | ||
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. ☒
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☒ |
| Non-accelerated filer ☐ | Smaller
reporting company |
| Emerging
growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒
The number of common shares outstanding as of November 3, 2020 was .
PART I - FINANCIAL INFORMATION
This Report on Form 10-Q (this “Report”) contains forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historical facts contained in this Report are forward-looking statements. In some cases, you can identify forward-looking statements by words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or the negative of these words or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:
| ● | our plans to research, develop and commercialize our product candidates; |
| ● | the initiation, progress, success, cost and timing of our clinical trials and product development activities; |
| ● | the therapeutic potential of our product candidates, and the disease indications for which we intend to develop our product candidates; |
| ● | our ability and timing to advance our product candidates into, and to successfully initiate, conduct, enroll and complete, clinical trials; |
| ● | our ability to manufacture our product candidates for clinical development and, if approved, for commercialization, and the timing and costs of such manufacture; |
| ● | the performance of third parties in connection with the development and manufacture of our product candidates, including third parties conducting our clinical trials as well as third-party suppliers and manufacturers; |
| ● | the potential of our cell therapy platform, and our plans to apply our platform to research, develop and commercialize our product candidates; |
| ● | our ability to obtain funding for our operations, including funding necessary to initiate and complete clinical trials of our product candidates; |
| ● | the size and growth of the potential markets for our product candidates and our ability to serve those markets; |
| ● | the potential scope and value of our intellectual property rights; |
| ● | our ability, and the ability of our licensors, to obtain, maintain, defend and enforce intellectual property rights protecting our product candidates, and our ability to develop and commercialize our product candidates without infringing the proprietary rights of third parties; |
| ● | our ability to recruit and retain key personnel; |
| ● | the effects of the COVID-19 pandemic on our operations; and |
| ● | other risks and uncertainties, including those described under Part II, Item 1A, “Risk Factors” of this Report and Part I, Item 1A, “Risk Factors” in our most recent Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “Commission”) on March 12, 2020. |
Any forward-looking statements in this Report reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Part II, Item 1A, “Risk Factors” of this Report and Part I, Item 1A, “Risk Factors” in our most recent Annual Report on Form 10-K filed with the Commission on March 12, 2020. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.
On August 9, 2019, BioTime, Inc. changed its corporate name to Lineage Cell Therapeutics, Inc. Unless the context requires otherwise, references in this Report to “Lineage,” “we,” “us,” and “our” refer to Lineage Cell Therapeutics, Inc. and its consolidated subsidiaries.
| 1 |
Item 1. Financial Statements
LINEAGE CELL THERAPEUTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
September
30, (Unaudited) | December
31, (Notes 2 and 3) | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Marketable equity securities | ||||||||
| Promissory note from Juvenescence (Note 5) | - | |||||||
| Trade accounts and grants receivable, net | ||||||||
| Receivables from affiliates, net | - | |||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| NONCURRENT ASSETS | ||||||||
| Property and equipment, net (Notes 6 and 15) | ||||||||
| Deposits and other long-term assets | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Financing lease and right of use lease liabilities, current portion (Note 15) | ||||||||
| Deferred revenues | ||||||||
| Liability classified warrants, current portion | - | |||||||
| Total current liabilities | ||||||||
| LONG-TERM LIABILITIES | ||||||||
| Deferred tax liability | ||||||||
| Deferred revenues, net of current portion | - | |||||||
| Right-of-use lease liability, net of current portion (Note 15) | ||||||||
| Financing lease, net of current portion | ||||||||
| Liability classified warrants, net of current portion | ||||||||
| TOTAL LIABILITIES | ||||||||
| Commitments and contingencies (Note 15) | ||||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Preferred
shares, | - | - | ||||||
| Common
shares, | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Lineage Cell Therapeutics, Inc. shareholders’ equity | ||||||||
| Noncontrolling deficit (Note 2) | ( | ) | ( | ) | ||||
| Total shareholders’ equity | ||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | $ | ||||||
See accompanying notes to the condensed consolidated interim financial statements.
| 2 |
LINEAGE CELL THERAPEUTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| REVENUES: | ||||||||||||||||
| Grant revenue | $ | $ | $ | $ | ||||||||||||
| Royalties from product sales and license fees | ||||||||||||||||
| Sale of research products and services | - | - | ||||||||||||||
| Total revenues | ||||||||||||||||
| Cost of sales | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gross profit | ||||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Research and development | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER INCOME/(EXPENSES): | ||||||||||||||||
| Interest income, net | ||||||||||||||||
| Gain on sale of marketable securities | ||||||||||||||||
| Gain
on sale of equity method in OncoCyte Corporation (“OncoCyte”) | - | - | ||||||||||||||
| Unrealized loss on marketable equity securities | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Unrealized (loss)/gain on equity method investment in OncoCyte at fair value | - | ( | ) | - | ||||||||||||
| Unrealized gain on equity method investment in Asterias at fair value | - | - | - | |||||||||||||
| Unrealized gain on warrant liability | ||||||||||||||||
| Other income, net | ||||||||||||||||
| Total other (expense) income, net | ( | ) | ( | ) | ( | ) | ||||||||||
| LOSS BEFORE INCOME TAXES | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Deferred income tax benefit | ||||||||||||||||
| NET LOSS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to noncontrolling interest | ||||||||||||||||
| NET LOSS ATTRIBUTABLE TO LINEAGE CELL THERAPEUTICS, INC. | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| NET LOSS PER COMMON SHARE: | ||||||||||||||||
| BASIC | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| DILUTED | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: | ||||||||||||||||
| BASIC | ||||||||||||||||
| DILUTED | ||||||||||||||||
See accompanying notes to the condensed consolidated interim financial statements.
| 3 |
LINEAGE CELL THERAPEUTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| NET LOSS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Other comprehensive loss, net of tax: | ||||||||||||||||
| Foreign currency translation adjustment, net of tax | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| COMPREHENSIVE LOSS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Less: Comprehensive loss attributable to noncontrolling interest | ||||||||||||||||
| COMPREHENSIVE LOSS ATTRIBUTABLE TO LINEAGE CELL THERAPEUTICS, INC. COMMON SHAREHOLDERS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
See accompanying notes to the condensed consolidated interim financial statements.
| 4 |
LINEAGE CELL THERAPEUTICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine Months Ended September 30, | ||||||||
| 2020 | 2019 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss attributable to Lineage Cell Therapeutics, Inc. | $ | ( | ) | $ | ( | ) | ||
| Net loss allocable to noncontrolling interest | ( | ) | ( | ) | ||||
| Adjustments to reconcile net loss attributable to Lineage Cell Therapeutics, Inc. to net cash used in operating activities: | ||||||||
| Unrealized gain on equity method investment in OncoCyte at fair value | - | ( | ) | |||||
| Unrealized gain on equity method investment in Asterias at fair value | - | ( | ) | |||||
| Gain on sale of marketable securities | ( | ) | ( | ) | ||||
| Unrealized loss on marketable equity securities | ||||||||
| Deferred income tax benefit | ( | ) | ( | ) | ||||
| Depreciation expense, including amortization of leasehold improvements | ||||||||
| Amortization of right-of-use asset | ||||||||
| Amortization of intangible assets | ||||||||
| Stock-based compensation | ||||||||
| Common stock issued for services | - | |||||||
| Gain on write-off and sales of assets | ( | ) | - | |||||
| Change in unrealized gain on warrant liability | ( | ) | ( | ) | ||||
| Write-off of security deposit | - | |||||||
| Amortization of deferred license fee | ( | ) | - | |||||
| Foreign currency remeasurement and other gain | ( | ) | ( | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts and grants receivable, net | ||||||||
| Accrued interest receivable | ( | ) | ( | ) | ||||
| Receivables from OncoCyte and AgeX, net of payables | ||||||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Accounts payable and accrued liabilities | ( | ) | ||||||
| Deferred revenue and other liabilities | - | |||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Proceeds from the sale of OncoCyte common shares | ||||||||
| Proceeds from the sale of AgeX common shares | ||||||||
| Proceeds from the sale of Hadasit common shares | ||||||||
| Cash and cash equivalents acquired in the Asterias Merger | - | |||||||
| Purchase of equipment and other assets | ( | ) | ( | ) | ||||
| Proceeds from sale of equipment | - | |||||||
| Security deposits and other | ( | ) | ||||||
| Net cash provided by investing activities | ||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from payment of Juvenescence promissory note | - | |||||||
| Common shares received and retired for employee taxes paid | ( | ) | ( | ) | ||||
| Reimbursement from landlord on tenant improvements | - | |||||||
| Proceeds from sales of common shares | - | |||||||
| Payments for offering costs | ( | ) | - | |||||
| Repayment of financing lease liabilities | ( | ) | ( | ) | ||||
| Proceeds from Paycheck Protection Program (“PPP”) Loan (Note 8) | - | |||||||
| Proceeds from sale of subsidiary warrants | - | ( | ) | |||||
| Repayment of principal portion of promissory notes | - | ( | ) | |||||
| Net cash provided by financing activities | ||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | ( | ) | ||||||
| NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | ( | ) | ||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH: | ||||||||
| At beginning of the period | ||||||||
| At end of the period | $ | $ | ||||||
See accompanying notes to the condensed consolidated interim financial statements.
| 5 |
LINEAGE CELL THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization and Business Overview
Lineage is a clinical-stage biotechnology company developing novel cell therapies for unmet medical needs. Lineage’s focus is to develop therapies for degenerative retinal diseases, neurological conditions associated with demyelination, and aiding the body in detecting and combating cancer. Specifically, Lineage is testing therapies to treat dry age-related macular degeneration, spinal cord injuries, and non-small cell lung cancer. Lineage’s programs are based on its proprietary cell-based therapy platform and associated development and manufacturing capabilities. From this platform Lineage develops and manufactures specialized, terminally differentiated human cells from its pluripotent and progenitor cell starting materials. These differentiated cells are transplanted into a patient either to replace or support cells that are dysfunctional or absent due to degenerative disease or traumatic injury, or administered as a means of helping the body mount an effective immune response to cancer.
Lineage
has
| ● | OpRegen®, a retinal pigment epithelium cell replacement therapy currently in a Phase 1/2a multicenter clinical trial for the treatment of advanced dry age-related macular degeneration (“AMD”) with geographic atrophy. There currently are no therapies approved by the U.S. Food and Drug Administration (“FDA”) for dry AMD, which accounts for approximately 85-90% of all AMD cases and is the leading cause of blindness in people over the age of 60. | |
| ● | OPC1, an oligodendrocyte progenitor cell therapy currently in a Phase 1/2a multicenter clinical trial for acute spinal cord injuries (“SCI”). This clinical trial has been partially funded by the California Institute for Regenerative Medicine. | |
| ● | VAC2, a cancer immunotherapy of antigen-presenting dendritic cells currently in a Phase 1 clinical trial in non-small cell lung cancer. This clinical trial is being funded and conducted by Cancer Research UK, the world’s largest independent cancer research charity. |
Lineage also is seeking to create value from additional assets, such as from patents or non-clinical candidates, including seeking to identify a commercialization or development partner for Renevia®. Renevia is a proprietary three-dimensional scaffold designed to support adipose tissue transplants that was granted a Conformité Européenne (“CE”) Mark in September 2019.
Asterias Merger
On November 7, 2018, Lineage, Asterias Biotherapeutics, Inc. (“Asterias”) and Patrick Merger Sub, Inc., a wholly owned subsidiary of Lineage, entered into an Agreement and Plan of Merger (the “Merger Agreement”) whereby Lineage agreed to acquire all of the outstanding common stock of Asterias in a stock-for-stock transaction (the “Asterias Merger”).
On
March 7, 2019, the shareholders of each of Lineage and Asterias approved the Merger Agreement. Prior to the Asterias Merger, Lineage
owned approximately
On
March 8, 2019, the Asterias Merger closed with Asterias surviving as a wholly owned subsidiary of Lineage. The former stockholders
of Asterias (other than Lineage) received common shares of Lineage for every share of Asterias common stock they owned. Lineage
issued common shares, including shares issued in respect of restricted stock units issued by Asterias that immediately
vested in connection with the closing of the Asterias Merger. The aggregate dollar value of such shares, based on the closing
price of Lineage common shares on March 8, 2019, was $
The Asterias Merger has been accounted for using the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, which requires, among other things, that the assets and liabilities assumed be recognized at their fair values as of the acquisition date.
See Note 3 for a full discussion of the Asterias Merger.
| 6 |
Investment in OncoCyte
Lineage
has significant equity holdings in OncoCyte Corporation (“OncoCyte”), a publicly traded molecular diagnostic company
(NYSE American: OCX), which Lineage founded and, in the past, was a majority-owned consolidated subsidiary until February 17,
2017, when Lineage deconsolidated OncoCyte’s financial statements. OncoCyte is focused on developing and commercializing
laboratory-developed tests to serve unmet medical needs across the cancer care continuum. As of September 30, 2020, Lineage owned
approximately shares of OncoCyte common stock, or
2. Basis of Presentation, Liquidity and Summary of Significant Accounting Policies
The unaudited condensed consolidated interim financial statements presented herein, and discussed below, have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. In accordance with those rules and regulations certain information and footnote disclosures normally included in comprehensive consolidated financial statements have been condensed or omitted. The condensed consolidated balance sheet as of December 31, 2019 was derived from the audited consolidated financial statements at that date, but does not include all the information and footnotes required by GAAP. These condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Lineage’s Annual Report on Form 10-K for the year ended December 31, 2019.
The accompanying condensed consolidated interim financial statements, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of Lineage’s financial condition and results of operations. The condensed consolidated results of operations are not necessarily indicative of the results to be expected for any other interim period or for the entire year.
Principles of consolidation
Lineage’s condensed consolidated interim financial statements include the accounts of its subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. The following table reflects Lineage’s ownership, directly or through one or more subsidiaries, of the outstanding shares of its operating subsidiaries as of September 30, 2020.
| Subsidiary | Field of Business | Lineage Ownership | Country | |||||
| Asterias BioTherapeutics, Inc. | % | USA | ||||||
| Cell Cure Neurosciences Ltd. (“Cell Cure”) | % (1) | Israel | ||||||
| ES Cell International Pte. Ltd. (“ESI”) | % | Singapore | ||||||
| OrthoCyte Corporation | % | USA | ||||||
| (1) |
As of September 30, 2020, Lineage consolidated its direct and indirect wholly owned or majority-owned subsidiaries because Lineage has the ability to control their operating and financial decisions and policies through its ownership, and the noncontrolling interest is reflected as a separate element of shareholders’ equity on Lineage’s consolidated balance sheets.
| 7 |
Liquidity
Since inception, Lineage has incurred significant operating losses and has funded its operations primarily through sale of common stock of AgeX Therapeutics, Inc. (“AgeX”) and OncoCyte, both former subsidiaries, sale of common stock of Hadasit Bio-Holdings (“HBL”), receipt of research grants, royalties from product sales, license revenues, sales of research products and issuance of equity securities.
On May 1, 2020, Lineage entered into a Controlled Equity OfferingSM Sales Agreement (the “Sales Agreement”) with Cantor Fitzgerald & Co., as sales agent (“Cantor Fitzgerald”), pursuant to which Lineage may, but is not obligated to, raise up to $ through the sale of common shares from time to time in at-the-market transactions under the Sales Agreement. As of September 30, 2020, no sales had been made under the Sales Agreement.
At
September 30, 2020, Lineage had an accumulated deficit of approximately $
On March 8, 2019, Asterias became Lineage’s wholly owned subsidiary, and Lineage began consolidating Asterias’ operations and results with its operations and results (see Note 3). Lineage has made extensive reductions in headcount and reduced non-clinical related spend, in each case, as compared to Asterias’ operations before the Asterias Merger.
Lineage’s projected cash flows are subject to various risks and uncertainties, and the unavailability or inadequacy of financing to meet future capital needs could force Lineage to modify, curtail, delay, or suspend some or all aspects of its planned operations. Lineage’s determination as to when it will seek new financing and the amount of financing that it will need will be based on Lineage’s evaluation of the progress it makes in its research and development programs, any changes to the scope and focus of those programs, any changes in grant funding for certain of those programs, and projection of future costs, revenues, and rates of expenditure. Lineage’s ability to raise additional funds may be adversely impacted by deteriorating global economic conditions and the disruptions to and volatility in the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic. Lineage may be required to delay, postpone, or cancel clinical trials or limit the number of clinical trial sites, unless it is able to obtain adequate financing. In addition, Lineage has incurred significant costs in connection with the acquisition of Asterias and with integrating its operations. Lineage may incur additional costs to maintain employee morale and to retain key employees. Lineage cannot assure that adequate financing will be available on favorable terms, if at all. Sales of additional equity securities by Lineage or its subsidiaries and affiliates could result in the dilution of the interests of current shareholders.
Business Combinations
Lineage accounts for business combinations, such as the Asterias Merger completed in March 2019, in accordance with ASC Topic 805, which requires the purchase price to be measured at fair value. When the purchase consideration consists entirely of Lineage common shares, Lineage calculates the purchase price by determining the fair value, as of the acquisition date, of shares issued in connection with the closing of the acquisition. Lineage recognizes estimated fair values of the tangible assets and intangible assets acquired, including in-process research and development (“IPR&D”), and liabilities assumed as of the acquisition date, and records as goodwill any amount of the fair value of the tangible and intangible assets acquired and liabilities assumed in excess of the purchase price.
Marketable Equity Securities
Lineage accounts for the shares it holds in OncoCyte, AgeX and HBL as marketable equity securities in accordance with ASC 320-10-25, Investments – Debt and Equity Securities, as amended by Accounting Standards Update (“ASU”) 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, further discussed below.
The OncoCyte and AgeX shares have readily determinable fair values quoted on the NYSE American under trading symbols “OCX” and “AGE”. The HBL shares have a readily determinable fair value quoted on the Tel Aviv Stock Exchange (“TASE”) under trading symbol “HDST” where share prices are denominated in New Israeli Shekels (NIS).
| 8 |
Prior
to September 11, 2019, Lineage accounted for its OncoCyte shares held at fair value, using the equity method of accounting.
Revenue Recognition
Lineage recognizes revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) ASU 2014-09, Revenues from Contracts with Customers (Topic 606), and in a manner that depicts the transfer of control of a product or a service to a customer and reflects the amount of the consideration it is entitled to receive in exchange for such product or service. In doing so, Lineage follows a five-step approach: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations; and (v) recognize revenue when (or as) the customer obtains control of the product or service. Lineage considers the terms of a contract and all relevant facts and circumstances when applying the revenue recognition standard. Lineage applies the revenue recognition standard, including the use of any practical expedients, consistently to contracts with similar characteristics and in similar circumstances.
Lineage’s largest source of revenue is currently related to government grants. In applying the provisions of ASU 2014-09, Lineage has determined that government grants are out of the scope of ASU 2014-09 because the government entities do not meet the definition of a “customer,” as defined by ASU 2014-09, as there is not considered to be a transfer of control of good or services to the government entities funding the grant. Lineage has, and will continue to, account for grants received to perform research and development services in accordance with ASC 730-20, Research and Development Arrangements, which requires an assessment, at the inception of the grant, of whether the grant is a liability or a contract to perform research and development services for others. If Lineage or a subsidiary receiving the grant is obligated to repay the grant funds to the grantor regardless of the outcome of the research and development activities, then Lineage is required to estimate and recognize that liability. Alternatively, if Lineage or a subsidiary receiving the grant is not required to repay, or if it is required to repay the grant funds only if the research and development activities are successful, then the grant agreement is accounted for as a contract to perform research and development services for others, in which case, grant revenue is recognized when the related research and development expenses are incurred (see Note 15).
Deferred
grant revenues represent grant funds received from the governmental funding agencies for which the allowable expenses have not
yet been incurred as of the balance sheet date reported. As of September 30, 2020, deferred grant revenue was $
Basic earnings per share is calculated by dividing net income or loss attributable to Lineage common shareholders by the weighted average number of common shares outstanding, net of unvested restricted stock or restricted stock units, subject to repurchase by Lineage, if any, during the period. Diluted earnings per share is calculated by dividing the net income or loss attributable to Lineage common shareholders by the weighted average number of common shares outstanding, adjusted for the effects of potentially dilutive common shares issuable under outstanding stock options and warrants, using the treasury-stock method, convertible preferred stock, if any, using the if-converted method, and treasury stock held by subsidiaries, if any.
For the three and nine months ended September 30, 2020 and 2019, respectively, Lineage reported a net loss attributable to common shareholders, and therefore, all potentially dilutive common shares were considered antidilutive for those periods.
| 9 |
Three Months Ended September 30, (unaudited) |
Nine Months Ended September 30, (unaudited) |
|||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Stock options | ||||||||||||||||
| Lineage Warrants (1) (Note 3) | ||||||||||||||||
| Restricted stock units | ||||||||||||||||
| (1) |
Restricted Cash
In accordance with ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, Lineage explains the change during the period in the total of cash, cash equivalents and restricted cash, and includes restricted cash with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the condensed consolidated statements of cash flows.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheet dates that comprise the total of the same such amounts shown in the condensed consolidated statements of cash flows for all periods presented herein (in thousands):
September 30, 2020 | December 31, 2019 | |||||||
| (unaudited) | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash included in deposits and other long-term assets (see Note 15) | ||||||||
| Total cash, cash equivalents, and restricted cash as shown in the condensed consolidated statements of cash flows | $ | $ | ||||||
Lease accounting and impact of adoption of the new lease standard
On January 1, 2019, Lineage adopted ASU 2016-02, Leases (Topic 842, “ASC 842”) and its subsequent amendments affecting Lineage: (i) ASU 2018-10, Codification Improvements to Topic 842, Leases; and (ii) ASU 2018-11, Leases (Topic 842): Targeted improvements, using the modified retrospective method.
Lineage
management determines if an arrangement is a lease at inception. Leases are classified as either financing or operating, with
classification affecting the pattern of expense recognition in the consolidated statements of operations. When determining whether
a lease is a finance lease or an operating lease, ASC 842 does not specifically define criteria to determine “major part
of remaining economic life of the underlying asset” and “substantially all of the fair value of the underlying asset.”
| 10 |
ROU assets represent Lineage’s right to use an underlying asset during the lease term and lease liabilities represent Lineage’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of Lineage’s leases do not provide an implicit rate, Lineage uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Lineage uses the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Lineage’s lease terms may include options to extend or terminate the lease when it is reasonably certain that Lineage will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Operating leases are included as right-of-use assets in property and equipment (see Note 6), and ROU lease liabilities, current and long-term, in the condensed consolidated balance sheets. Financing leases are included in property and equipment, and in financing lease liabilities, current and long-term, in Lineage’s condensed consolidated balance sheets.
In
connection with the adoption on ASC 842 on January 1, 2019, Lineage derecognized net book value of leasehold improvements and
corresponding lease liabilities of $
The adoption of ASC 842 had a material impact in Lineage’s consolidated balance sheets, with the most significant impact resulting from the recognition of ROU assets and lease liabilities for operating leases with remaining terms greater than twelve months on the adoption date. Lineage’s accounting for financing leases (previously referred to as “capital leases”) remained substantially unchanged (see Note 15).
Recently Adopted Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which modifies certain disclosure requirements for reporting fair value measurements. ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Lineage adopted this standard on January 1, 2020 and it did not have a significant impact on our consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted - The recently issued accounting pronouncements applicable to Lineage that are not yet effective should be read in conjunction with the recently issued accounting pronouncements, as applicable and disclosed in Lineage’s Annual Report on Form 10-K for the year ended December 31, 2019.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. The ASU enhances and simplifies various aspects of the income tax accounting guidance in ASC 740 and removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. This ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years with early adoption permitted. Lineage is currently evaluating the impact the adoption of this guidance may have on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for Lineage beginning January 1, 2023. Lineage has not yet completed its assessment of the impact of the new standard on its consolidated financial statements.
| 11 |
3. Asterias Merger
On
March 8, 2019, the Asterias Merger closed with Asterias surviving as a wholly owned subsidiary of Lineage. The former stockholders
of Asterias (other than Lineage) received common shares of Lineage (the “Merger Consideration”) for every share
of Asterias common stock they owned (the “Merger Exchange Ratio”). Lineage issued common shares, including
shares issued in respect of restricted stock units issued by Asterias that immediately vested in connection with the closing
of the Asterias Merger. The fair value of such shares, based on the closing price of Lineage common shares on March 8, 2019, was
$
In connection with the closing of the Asterias Merger, Lineage assumed outstanding warrants to purchase shares of Asterias common stock, as further discussed below and in Note 11, and assumed sponsorship of the Asterias 2013 Equity Incentive Plan (see Note 12). All stock options to purchase shares of Asterias common stock outstanding immediately prior to the closing of the Asterias Merger were canceled at the closing for no consideration.
As of March 8, 2019, the assets and liabilities of Asterias have been included in the condensed consolidated balance sheet of Lineage. The results of operations of Asterias from March 8, 2019 through December 31, 2019 have been included in the condensed consolidated statement of operations of Lineage for the year ended December 31, 2019.
Calculation of the purchase price
The calculation of the purchase price for the Asterias Merger and the Merger Consideration transferred on March 8, 2019 was as follows (in thousands, except for share and per share amounts):
Lineage (38% ownership interest) | Shareholders other than Lineage (approximate 62% ownership interest) | Total | ||||||||||
| Outstanding Asterias common stock as of March 8, 2019 | (1) | (1) | ||||||||||
| Exchange ratio | ||||||||||||
| Lineage common shares issuable | (2) | (3) | ||||||||||
| Per share price of Lineage common shares as of March 8, 2019 | $ | $ | $ | |||||||||
| Purchase price (in thousands) | $ | (2) | $ | $ | ||||||||
| (1) | |
| (2) | |
| (3) |
| 12 |
Purchase price allocation
Lineage allocated the acquisition consideration to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. The fair value of the acquired tangible and identifiable intangible assets were determined based on inputs that are unobservable and significant to the overall fair value measurement. It is also based on estimates and assumptions made by management at the time of the acquisition. As such, this was classified as Level 3 fair value hierarchy measurements and disclosures.
The allocation of the purchase price in the table below is based on our estimates of the fair values of tangible and intangible assets acquired, including IPR&D, and liabilities assumed as of the acquisition date, with the excess recorded as goodwill (in thousands). As of December 31, 2019, Lineage had finalized its purchase price allocation.
| Assets acquired: | ||||
| Cash and cash equivalents | $ | |||
| Prepaid expenses and other assets, current and noncurrent | ||||
| Machinery and equipment | ||||
| Long-lived intangible assets - royalty contracts | ||||
| Acquired in-process research and development (“IPR&D”) | ||||
| Total assets acquired |
| Liabilities assumed: | ||||
| Accrued liabilities and accounts payable | ||||
| Liability classified warrants | ||||
| Deferred license revenue | ||||
| Long-term deferred income tax liability | ||||
| Total liabilities assumed | ||||
| Net assets acquired, excluding goodwill (a) | ||||
| Fair value of Lineage common shares held by Asterias (b) | ||||
| Total purchase price (c) | ||||
| Estimated goodwill (c-a-b) | $ |
The valuation of identifiable intangible assets and their estimated useful lives are as follows (in thousands, except for useful life):
| Asset
Fair Value | Useful Life (Years) | | ||||||
| (in thousands, except for useful life) | ||||||||
| In process research and development (“IPR&D”) | $ | n/a | ||||||
| Royalty contracts | ||||||||
| $ | ||||||||
| 13 |
The following is a discussion of the valuation methods used to determine the fair value of Asterias’ significant assets and liabilities in connection with the Asterias Merger:
IPR&D
and Deferred Income Tax Liability - The fair value of identifiable acquired IPR&D intangible assets consisting of $
Lineage
determined that the estimated aggregate fair value of the AST-Clinical programs was $
To calculate fair value of the AST-Clinical programs under the discounted cash flow method, Lineage used probability-weighted, projected cash flows discounted at a rate considered appropriate given the significant inherent risks associated with cell therapy development by clinical-stage companies. Cash flows were calculated based on estimated projections of revenues and expenses related to each respective program. Cash flows were assumed to extend through a seven-year market exclusivity period for the OPC1 program from the date of market launch. Revenues from commercialization of the AST-Clinical Programs were based on estimated market potential for the indication of each program. The resultant cash flows were then discounted to present value using a weighted-average cost of capital for companies with profiles substantially similar to that of Lineage, which Lineage believes represents the rate that market participants would use to value the assets. Lineage compensated for the phase of development of the program by applying a probability factor to its estimation of the expected future cash flows. The projected cash flows were based on significant assumptions, including the indications in which Lineage will pursue development of the AST-Clinical programs, the time and resources needed to complete the development and regulatory approval, estimates of revenue and operating profit related to the program considering its stage of development, the life of the potential commercialized product, market penetration and competition, and risks associated with achieving commercialization, including delay or failure to obtain regulatory approvals to conduct clinical studies, failure of clinical studies, delay or failure to obtain required market clearances, and intellectual property litigation.
These IPR&D assets are indefinite-lived intangible assets until the completion or abandonment of the associated research and development (“R&D”) efforts. Once the R&D efforts are completed or abandoned, the IPR&D will either be amortized over the asset life as a finite-lived intangible asset or be impaired, respectively, in accordance with ASC 350, Intangibles - Goodwill and Other. In accordance with ASC 350, goodwill and acquired IPR&D are determined to have indefinite lives and, therefore, are not amortized. Instead, they are tested for impairment at least annually and between annual tests if Lineage becomes aware of an event or a change in circumstances that would indicate the asset may be impaired.
Because the IPR&D (prior to completion or abandonment of the R&D) is considered an indefinite-lived asset for accounting purposes, the fair value of the IPR&D on the acquisition date creates a deferred income tax liability (“DTL”) in accordance with ASC 740, Income Taxes (see Note 13). This DTL is computed using the fair value of the IPR&D assets on the acquisition date multiplied by Lineage’s federal and state income tax rates. While this DTL would reverse on impairment or sale or commencement of amortization of the related intangible assets, those events are not anticipated under ASC 740 for purposes of predicting reversal of a temporary difference to support the realization of deferred tax assets, except for certain deferred tax assets and credit carryforwards that are also indefinite in nature as of the closing of the Asterias Merger, which may be considered for reversal under ASC 740 as further discussed in Note 13.
| 14 |
Royalty
contracts - Asterias has certain royalty revenues for “research only use” culture media for pre-clinical research
applications under certain, specific patent families under contracts which preclude the customers to sell for commercial use or
for clinical trials. These royalty cash flows are generated under certain specific patent families that Asterias previously acquired
from Geron Corporation (“Geron”). Asterias pays Geron a royalty for all royalty revenues received from these contracts.
Because these patents are a subset of the clinical programs discussed above, are expected to continue to generate revenues for
Asterias and are not to be used in the OPC1 or the VAC2 programs, these patents are considered to be separate long-lived intangible
assets under ASC 805. These intangible assets are also valued primarily through the use of the discounted cash flow method under
the income approach, and will be amortized over their useful life, estimated to be
Deferred
license revenue - In September 2018, Asterias and Novo Nordisk A/S (“Novo Nordisk”) entered into an option for
Novo Nordisk or its designated U.S. affiliate to license, on a non-exclusive basis, certain intellectual property related to culturing
pluripotent stem cells, such as hES cells, in suspension. Under the terms of the option, Asterias received a one-time upfront
payment of $
For
business combination purposes under ASC 805, the fair value of this performance obligation to Lineage, from a market participant
perspective, was the estimated costs Lineage may incur, plus a normal profit margin for the level of effort required to perform
under the contract after the acquisition date, assuming Novo Nordisk exercised its option, including negotiation costs, legal
fees, arbitration, if any, and other related costs. Management estimated those costs, plus a normal profit margin, to be approximately
$
Liability
classified warrants - On May 13, 2016, in connection with a common stock offering, Asterias issued warrants to purchase
The
fair value of the Asterias Warrants was determined by using Black-Scholes option pricing models which take into consideration
the probability of the Fundamental Transaction, which for purposes of the above valuation was assumed to be at
As
of September 30, 2020, the total number of common shares of Lineage subject to warrants that were assumed by Lineage in connection
with the Asterias Merger was
| 15 |
Fair
value of Lineage common shares held by Asterias - As of March 8, 2019, Asterias held
Goodwill - Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed. Goodwill is not amortized but is tested for impairment at least annually, or more frequently if circumstances indicate potential impairment.
Depending on the structure of a particular acquisition, goodwill and identifiable intangible assets may not be deductible for tax purposes. Goodwill recorded in the Asterias Merger is not expected to be deductible for tax purposes (see Note 13).
Acquisition
related costs recorded in general and administrative expenses for the three months ended September 30, 2020 and 2019 were immaterial.
Acquisition related costs recorded in general and administrative expenses were $
Prior
to the consummation of the Asterias Merger in March 2019, Lineage elected to account for its shares of Asterias common
stock at fair value using the equity method of accounting.
Asterias Merger Related Litigation - See Note 15 Commitments and Contingencies for discussion regarding litigation related to the Asterias Merger.
4. Accounting for Common Stock of OncoCyte, at Fair Value
Prior
to September 11, 2019, Lineage elected to account for its shares of OncoCyte common stock at fair value using the equity method
of accounting. Lineage sold shares of OncoCyte common stock for net proceeds of $
As
of December 31, 2019, Lineage owned approximately shares of OncoCyte common stock. These shares had a fair value of
$
As
of September 30, 2020, Lineage owned approximately shares of OncoCyte common stock, or
For
the three months ended September 30, 2020, Lineage recorded an unrealized loss of $
| 16 |
For
the nine months ended September 30, 2020, Lineage recorded a realized gain of $
All share prices are determined based on the closing price of OncoCyte common stock on the NYSE American on the applicable dates, or the last day of trading of the applicable quarter, if the last day of a quarter fell on a weekend.
5. Sale of Significant Ownership Interest in AgeX to Juvenescence Limited
On
August 30, 2018, Lineage entered into a Stock Purchase Agreement with Juvenescence Limited and AgeX, pursuant to which Lineage
sold million shares of common stock of AgeX to Juvenescence for $ per share, or an aggregate purchase price of $
The
Promissory Note bore interest at
For
the three and nine months ended September 30, 2020, Lineage recognized $
The Shared Facilities Agreement was terminated on July 31, 2019 with respect to the use of Lineage’s office and laboratory facilities and September 30, 2019 with respect to all other remaining shared services.
6. Property and Equipment, Net
At September 30, 2020 and December 31, 2019, property and equipment was comprised of the following (in thousands):
September 30, 2020 | December
31, 2019 | |||||||
| (unaudited) | ||||||||
| Equipment, furniture and fixtures | $ | $ | ||||||
| Leasehold improvements | ||||||||
| Right-of-use assets (1) | ||||||||
| Accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
| (1) |
| 17 |
Property
and equipment at September 30, 2020 and December 31, 2019 includes $
Depreciation
and amortization expense amounted to $
7. Goodwill and Intangible Assets, Net
At September 30, 2020 and December 31, 2019, goodwill and intangible assets, net consisted of the following (in thousands):
September 30, 2020 | December 31, 2019 | |||||||
| (unaudited) | ||||||||
| Goodwill(1) | $ | $ | ||||||
| Intangible assets: | ||||||||
| Acquired IPR&D - OPC1 (from the Asterias Merger)(2) | $ | $ | ||||||
| Acquired IPR&D - VAC2 (from the Asterias Merger)(2) | ||||||||
| Intangible assets subject to amortization: | ||||||||
| Acquired patents | ||||||||
| Acquired royalty contracts(2) | ||||||||
| Total intangible assets | ||||||||
| Accumulated amortization | ( | ) | ( | ) | ||||
| Intangible assets, net | $ | $ | ||||||
| (1) | |
| (2) |
Amortization
recognized in research and development expenses was $
8. Accounts Payable and Accrued Liabilities
At September 30, 2020 and December 31, 2019, accounts payable and accrued liabilities consisted of the following (in thousands):
| September 30, 2020 | December 31, 2019 | |||||||
| (unaudited) | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued compensation | ||||||||
| Accrued liabilities | ||||||||
| PPP loan payable | - | |||||||
| Other current liabilities | ||||||||
| Total | $ | $ | ||||||
| 18 |
Accounts
payable includes $
PPP Loan Payable
In
April 2020, Lineage received a loan for $
2019 Separation Payments
In
connection with the Asterias Merger, several Asterias employees were terminated as of the Asterias Merger date. Three of these
employees had employment agreements with Asterias which entitled them to change in control and separation payments in the aggregate
of $
Additionally,
Lineage entered into a plan of termination with substantially all other previous employees of Asterias with potential separation
payments in the aggregate of $
In
connection with the relocation of Lineage’s corporate headquarters to Carlsbad, California, discussed in Note 15, Lineage
entered into a plan of termination with certain Lineage employees with potential separation payments in the aggregate of $
9. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value (ASC 820-10-50), Fair Value Measurements and Disclosures:
| ● | Level 1 – Inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets. | |
| ● | Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | |
| ● | Level 3 – Inputs to the valuation methodology are unobservable; that reflect management’s own assumptions about the assumptions market participants would make and significant to the fair value. |
| 19 |
We measure cash, cash equivalents, marketable securities and our liability classified warrants at fair value on a recurring basis. The fair values of such assets were as follows for September 30, 2020 and December 31, 2019 (in thousands):
| Fair Value Measurements Using | ||||||||||||||||
| Balance at September 30, 2020 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| Assets: | ||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | ||||||||||||
| Marketable securities | ||||||||||||||||
| Liabilities: | ||||||||||||||||
| Lineage Warrants | ||||||||||||||||
| Cell Cure Warrants | ||||||||||||||||
| Fair Value Measurements Using | ||||||||||||||||
| Balance at December 31, 2019 | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
| Assets: | ||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | - | $ | |||||||||||
| Marketable securities | ||||||||||||||||
| Liabilities: | ||||||||||||||||
| Lineage Warrants | ||||||||||||||||
| Cell Cure Warrants | ||||||||||||||||
We have not transferred any instruments between the three levels of the fair value hierarchy.
In determining fair value, Lineage utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, and also considers counterparty credit risk in its assessment of fair value.
Marketable securities include our positions in OncoCyte, AgeX and HBL. All of these securities have readily determinable fair values quoted on the NYSE American or TASE stock exchanges. These securities are measured at fair value and reported as current assets on the consolidated balance sheets based on the closing trading price of the security as of the date being presented.
The
fair value of the Lineage Warrants is determined by using Black-Scholes option pricing models which take into consideration the
probability of a fundamental transaction, as defined in the warrant agreement, the exercise price of the warrants and the contractual
remaining term of the warrants. The Lineage Warrants have an expiration date of May 13, 2021. The Lineage Warrants are included
in current liabilities on the condensed consolidated balance sheets. Changes in the fair value of the Lineage Warrants at each
reporting period are included in the condensed consolidated statements of operations under unrealized gain on warrant liability.
For the three and nine months ended September 30, 2020, Lineage recognized unrealized gains of $
| 20 |
The
fair value of the Cell Cure Warrants (defined below) is determined by using Black-Scholes option pricing models which take into
consideration the fair value of the Cell Cure ordinary shares, adjusted for lack of marketability, as appropriate, the contractual
remaining term of the warrants and the expected stock price volatility over the term. The Cell Cure Warrants are included in current
(portion with terms expiring within the next twelve months) and long-term liabilities on the condensed consolidated balance sheets.
Changes in the fair value of the Cell Cure Warrants at each reporting period are included in the condensed consolidated statements
of operations under unrealized gain on warrant liability. For the three and nine months ended September 30, 2020, Lineage recognized
unrealized gains of $
The fair value of Lineage’s assets and liabilities, which qualify as financial instruments under FASB guidance regarding disclosures about fair value of financial instruments, approximate the carrying amounts presented in the accompanying consolidated balance sheets. The carrying amounts of accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities approximate fair values because of the short-term nature of these items.
10. Related Party Transactions
Shared Facilities and Service Agreements with Affiliates
Under the terms of Shared Facilities Agreements, Lineage allowed OncoCyte and AgeX to use Lineage’s premises and equipment located at Lineage’s headquarters in Alameda, California for the purpose of conducting business. Lineage also provided accounting, billing, bookkeeping, payroll, treasury, payment of accounts payable, and other similar administrative services to OncoCyte and AgeX. The Shared Facilities Agreements also allowed Lineage to provide the services of attorneys, accountants, and other professionals who may provide professional services to Lineage. Lineage also provided OncoCyte and AgeX with the services of laboratory and research personnel, including Lineage employees and contractors, for the performance of research and development work for OncoCyte and AgeX at the premises. Shared services with AgeX were terminated on July 31, 2019 with respect to the use of Lineage’s office and laboratory facilities and September 30, 2019 with respect to all other remaining shared services. Shared services with OncoCyte were terminated on September 30, 2019, and December 31, 2019 with respect to all other remaining shared services.
Lineage
charged OncoCyte and AgeX a “Use Fee” for services provided and for use of Lineage facilities, equipment, and supplies.
For each billing period, Lineage prorated and allocated to OncoCyte and AgeX costs incurred, including costs for services of Lineage
employees and use of equipment, insurance, leased space, professional services, software licenses, supplies and utilities. The
allocation of costs depended on key cost drivers, including actual documented use, square footage of facilities used, time spent,
costs incurred by Lineage for OncoCyte and AgeX, or upon proportionate usage by Lineage, OncoCyte and AgeX, as reasonably estimated
by Lineage. Lineage, at its discretion, had the right to charge OncoCyte and AgeX a
The
Use Fee was determined and invoiced to OncoCyte and AgeX on a regular basis, generally monthly or quarterly. Each invoice was
payable in full within
In addition to the Use Fee, OncoCyte and AgeX reimbursed Lineage for any out of pocket costs incurred by Lineage for the purchase of office supplies, laboratory supplies, and other goods and materials and services for the account or use of OncoCyte or AgeX. Lineage was not obligated to purchase or acquire any office supplies or other goods and materials or any services for OncoCyte or AgeX, and if any such supplies, goods, materials or services were obtained, Lineage could arrange for the suppliers to invoice OncoCyte or AgeX directly.
| 21 |
The Use Fees charged to OncoCyte and AgeX were not reflected in revenues, but instead Lineage’s general and administrative expenses and research and development expenses were shown net of those charges in the condensed consolidated statements of operations.
For
the three months ended September 30, 2019, Lineage charged Use Fees of $
For
the nine months ended September 30, 2019, Lineage charged Use Fees of $
Other related party transactions
Lineage
currently pays $
In April 2019, Lineage issued common shares of Lineage to Broadwood Partners, L.P., an Asterias and Lineage shareholder, in exchange for the settlement of Asterias Warrants in connection with the Asterias Merger (see Note 3).
In
connection with the putative shareholder class action lawsuits filed in February 2019 and October 2019 challenging the Asterias
Merger (see Note 15), Lineage has agreed to pay for the legal defense of Neal Bradsher, director, and Broadwood Partners, L.P.,
a shareholder of Lineage, and Broadwood Capital, Inc., which manages Broadwood Partners, L.P., all of which were named in the
lawsuits. Through September 30, 2020, Lineage has incurred a total of $
As part of financing transactions in which there were multiple other purchasers, Broadwood Partners, L.P. purchased shares, shares and shares of OncoCyte common stock from Lineage in July 2019, September 2019 and January 2020, respectively.
11. Shareholders’ Equity
Preferred Shares
Lineage is authorized to issue preferred shares. The preferred shares may be issued in one or more series as our board of directors may determine by resolution. Our board of directors is authorized to fix the number of shares of any series of preferred shares and to determine or alter the rights, preferences, privileges, and restrictions granted to or imposed on the preferred shares as a class, or upon any wholly unissued series of any preferred shares. Our board of directors may, by resolution, increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any series of preferred shares subsequent to the issue of shares of that series. There are preferred shares issued and outstanding.
Common Shares
At
September 30, 2020, Lineage was authorized to issue common shares,
| 22 |
At-The-Market Offering
On
May 1, 2020, Lineage entered into the Sales Agreement, pursuant to which Lineage may offer and sell, from time to time, through
Cantor Fitzgerald, common shares of Lineage having an aggregate offering price of up to $
Lineage
agreed to pay Cantor Fitzgerald a commission of
Reconciliation of Changes in Shareholders’ Equity
The following tables document the changes in shareholders’ equity for the three and nine months ended September 30, 2020 and 2019 (unaudited and in thousands):
| Preferred Shares | Common Shares | Noncontrolling | Accumulated Other | Total | ||||||||||||||||||||||||||||
| Number | Number | Accumulated | Interest/ | Comprehensive | Shareholders’ | |||||||||||||||||||||||||||
| of Shares | Amount | of Shares | Amount | Deficit | (Deficit) | Income | Equity | |||||||||||||||||||||||||
| BALANCE AT DECEMBER 31, 2019 | - | $ | - | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||
| Shares issued upon vesting of restricted stock units, net of shares retired to pay employees’ taxes | - | ( | ) | - | - | - | ( | ) | ||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Foreign currency translation gain (loss) | - | - | - | - | - | - | ||||||||||||||||||||||||||
| NET LOSS | - | - | - | - | ( | ) | ( | ) | - | ( | ) | |||||||||||||||||||||
| BALANCE AT MARCH 31, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||||||
| Shares issued upon vesting of restricted stock units, net of shares retired to pay employees’ taxes | - | - | ( | ) | - | - | - | ( | ) | |||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Financing related fees | - | - | - | ( | ) | - | - | - | ( | ) | ||||||||||||||||||||||
| Foreign currency translation gain (loss) | - | - | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| NET LOSS | - | - | - | - | ( | ) | ( | ) | - | ( | ) | |||||||||||||||||||||
| BALANCE AT JUNE 30, 2020 | - | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||
| Shares issued upon vesting of restricted stock units, net of shares retired to pay employees’ taxes | - | - | ( | ) | - | - | - | ( | ) | |||||||||||||||||||||||
| Shares issued for services | - | - | - | - | - | |||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Dissolution of BioTime Asia | - | - | - | ( | ) | - | - | |||||||||||||||||||||||||
| Financing related fees | - | - | - | ( | ) | - | - | - | ( | ) | ||||||||||||||||||||||
| Foreign currency translation gain (loss) | - | - | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| NET LOSS | - | - | - | - | ( | ) | ( | ) | - | ( | ) | |||||||||||||||||||||
| BALANCE AT SEPTEMBER 30, 2020 | - | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||
| 23 |
| Accumulated | ||||||||||||||||||||||||||||||||
| Preferred Shares | Common Shares | Noncontrolling | Other | Total | ||||||||||||||||||||||||||||
| Number | Number | Accumulated | Interest/ | Comprehensive | Shareholders’ | |||||||||||||||||||||||||||
| of Shares | Amount | of Shares | Amount | Deficit | (Deficit) | Income | Equity | |||||||||||||||||||||||||
| BALANCE AT DECEMBER 31, 2018 | - | $ | - | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||||
| Shares issued in connection with the Asterias Merger | - | - | - | - | - | |||||||||||||||||||||||||||
| Shares retired in connection with the Asterias Merger | - | - | ( | ) | ( | ) | - | - | - | ( | ) | |||||||||||||||||||||
| Shares issued upon vesting of restricted stock units, net of shares retired to pay employees’ taxes | - | ( | ) | - | - | - | ( | ) | ||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Stock-based compensation for shares issued upon vesting of Asterias restricted stock units attributable to post combination services | - | - | - | - | ||||||||||||||||||||||||||||
| Adjustment upon adoption of leasing standard | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Foreign currency translation gain (loss) | - | - | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| NET INCOME/(LOSS) | - | - | - | - | ( | ) | - | |||||||||||||||||||||||||
| BALANCE AT MARCH 31, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||||||
| Shares issued for settlement of Lineage Warrants | - | - | - | - | ||||||||||||||||||||||||||||
| Shares issued upon vesting of restricted stock units, net of shares retired to pay employees’ taxes | - | ( | ) | - | - | - | ( | ) | ||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | - | - | ||||||||||||||||||||||||||
| Foreign currency translation gain (loss) | - | - | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| NET LOSS | - | - | - | - | ( | ) | ( | ) | - | ( | ) | |||||||||||||||||||||
| BALANCE AT JUNE 30, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||||||
| Shares issued upon vesting of restricted stock units, net of shares retired to pay employees’ taxes | - | ( | ) | - | - | - | ( | ) | ||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | - | |||||||||||||||||||||||||||
| Shares issued through ATM | - | - | - | - | ||||||||||||||||||||||||||||
| Foreign currency translation gain (loss) | - | - | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| NET LOSS | - | - | - | - | ( | ) | ( | ) | - | ( | ) | |||||||||||||||||||||
| BALANCE AT SEPTEMBER 30, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||
Warrants
Lineage (previously Asterias) Warrants - Liability Classified
In
March 2019, in connection with the closing of the Asterias Merger, Lineage assumed outstanding Asterias Warrants. As of September
30, 2020, the total number of common shares of Lineage subject to warrants that were assumed by Lineage in connection with the
Asterias Merger was
Cell Cure Warrants - Liability Classified
Cell
Cure has two sets of issued warrants (the “Cell Cure Warrants”). Warrants to purchase
Equity Incentive Plan Awards
Effective November 8, 2019, Lineage adopted an amendment changing the name of the BioTime, Inc. 2012 Equity Incentive Plan to the Lineage Cell Therapeutics, Inc. 2012 Equity Incentive Plan (the “2012 Plan”). The 2012 Plan provides for the grant of stock options, restricted stock, restricted stock units (“RSUs”) and stock appreciation rights. As of December 31, 2019, a maximum of common shares were available for grant under the 2012 Plan. Recipients of stock options are eligible to purchase common shares at an exercise price equal to the fair market value of such shares on the date of grant. The maximum term of options granted under the 2012 Plan is years. Stock options generally vest over a four-year period based on continuous service; however, the 2012 Plan allows for other vesting periods. Upon the expiration of the restrictions applicable to an RSU, Lineage will either issue to the recipient, without charge, one common share per RSU or cash in an amount equal to the fair market value of one common share. RSUs granted from the 2012 Plan reduce the shares available for grant by two shares for each RSU granted.
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Shares Available for Grant | Number of Options Outstanding | Number of RSUs Outstanding | Weighted Average Exercise Price | |||||||||||||
| December 31, 2019 | $ | |||||||||||||||
| Restricted stock units vested | ( | ) | ||||||||||||||
| Options granted | ( | ) | ||||||||||||||
| Options exercised | ||||||||||||||||
| Options expired/forfeited/cancelled | ( | ) | ||||||||||||||
| September 30, 2020 | $ | |||||||||||||||
| Options exercisable at September 30, 2020 | $ | |||||||||||||||
At the effective time of the Asterias Merger, Lineage assumed sponsorship of the Asterias 2013 Equity Incentive Plan (the “Asterias Equity Plan”), with references to Asterias and Asterias common stock therein to be deemed references to Lineage and Lineage common shares. There were shares available under the Asterias Equity Plan immediately before the closing of the Asterias Merger, which became shares immediately following the Asterias Merger. The shares available under the Asterias Equity Plan will be for awards granted to those former Asterias employees who continued as Lineage employees upon consummation of the Asterias Merger.
Shares Available for Grant | Number of Options Outstanding | Weighted Average Exercise Price | ||||||||||
| December 31, 2019 | $ | |||||||||||
| Options granted | ||||||||||||
| Options exercised | ||||||||||||
| Options forfeited | ||||||||||||
| September 30, 2020 | $ | |||||||||||
| Options exercisable at September 30, 2020 | $ | |||||||||||
Stock-based compensation expense
Nine Months Ended September 30, (unaudited) | ||||||||
| 2020 | 2019 | |||||||
| Expected life (in years) | ||||||||
| Risk-free interest rates | % | % | ||||||
| Volatility | % | % | ||||||
| Dividend yield | % | % | ||||||
Three Months Ended September 30, (unaudited) | Nine Months Ended September 30, (unaudited) | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Research and development | $ | $ | $ | $ | ||||||||||||
| General and administrative | ||||||||||||||||
| Total stock-based compensation expense | $ | $ | $ | $ | ||||||||||||
| 25 |
The expense related to shares of Asterias restricted stock unit awards that immediately vested on the closing of the Asterias Merger and converted into the right to receive common shares of Lineage based on the Merger Exchange Ratio, resulting in common shares of Lineage issued on March 8, 2019, was included in stock-based compensation expense for the nine months ended September 30, 2019. The expense was not included as part of the purchase price of the Asterias Merger because these awards were principally attributable to post-combination services.
13. Income Taxes
The provision for income taxes for interim periods is generally determined using an estimated annual effective tax rate as prescribed by ASC 740-270, Income Taxes, Interim Reporting. The effective tax rate may be subject to fluctuations during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as valuation allowances and changes in valuation allowances against deferred tax assets, the recognition or de-recognition of tax benefits related to uncertain tax positions, if any, and changes in or the interpretation of tax laws in jurisdictions where Lineage conducts business. ASC 740-270 also states that if an entity is unable to reliably estimate some or a part of its ordinary income or loss, the income tax provision or benefit applicable to the item that cannot be estimated shall be reported in the interim period in which the item is reported.
For items that Lineage cannot reliably estimate on an annual basis (principally unrealized gains or losses generated by changes in the market prices of the OncoCyte, and AgeX shares of common stock Lineage holds, and prior to March 8, 2019, Asterias shares Lineage held), Lineage uses the actual year to date effective tax rate rather than an estimated annual effective tax rate to determine the tax effect of each item, including the use of all available net operating losses and other credits or deferred tax assets.
The market value of the shares of OncoCyte common stock Lineage holds creates a deferred tax liability to Lineage based on the closing prices of the shares, less Lineage’s tax basis in the shares. The deferred tax liability generated by the OncoCyte shares that Lineage holds as of September 30, 2020, is a source of future taxable income to Lineage, as prescribed by ASC 740-10-30-17, that will more likely than not result in the realization of its deferred tax assets to the extent of the deferred tax liability. This deferred tax liability is determined based on the closing prices of the OncoCyte shares as of September 30, 2020. Due to the inherent unpredictability of future prices of those shares, Lineage cannot reliably estimate or project those deferred tax liabilities on an annual basis. Therefore, the deferred tax liability pertaining to OncoCyte shares, determined based on the actual closing prices on the last stock market trading day of the applicable accounting period, and the related impacts to the valuation allowance and deferred tax asset changes, are recorded in the accounting period in which they occur.
Prior to the Asterias Merger discussed in Note 3, the Asterias shares Lineage held generated similar deferred tax liabilities to Lineage as the OncoCyte shares discussed above. As of the Asterias Merger date and due to Asterias becoming a wholly owned subsidiary of Lineage, the Asterias deferred tax liabilities were eliminated with a corresponding adjustment to Lineage’s valuation allowance, resulting in no tax provision or benefit from this adjustment.
In
connection with the Asterias Merger, a deferred tax liability of $
| 26 |
A
valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized.
Lineage established a full valuation allowance as of December 31, 2018 due to the uncertainty of realizing future tax benefits
from its net operating loss carryforwards and other deferred tax assets, including foreign net operating losses generated by its
subsidiaries. During the year ended December 31, 2019, a portion of the valuation allowance was released as it relates to Lineage’s
indefinite lived assets that can be used against the indefinite lived liabilities. The amount of the valuation allowance released
was $
For
the three and nine months ended September 30, 2019, Lineage recorded a $
For
the three and nine months ended September 30, 2020, Lineage recorded a $
14. Supplemental Cash Flow Information
Supplemental disclosure of cash flow information for the nine months ended September 30, 2020 and 2019 is as follows (in thousands):
Nine Months Ended September 30, (unaudited) | ||||||||
| 2020 | 2019 | |||||||
| Cash paid during period for interest | $ | $ | ||||||
| Supplemental disclosures of non-cash investing and financing activities: | ||||||||
| Issuance of common shares for the Asterias Merger (Note 3) | $ | $ | ||||||
| Assumption of liabilities in the Asterias Merger (Note 3) | ||||||||
| Assumptions of warrants in the Asterias Merger (Note 3) | ||||||||
| Issuance of common shares for settlement of Lineage Warrants | ||||||||
15. Commitments and Contingencies
Carlsbad Lease
In
May 2019, Lineage entered into a lease for approximately
Base
rent under the Carlsbad Lease beginning on August 1, 2019 is $
In
addition to base rent, Lineage will pay a pro rata portion of increases in certain expenses, including real property taxes, utilities
(to the extent not separately metered to the leased space) and the landlord’s operating expenses, over the amounts of those
expenses incurred by the landlord. As security for the performance of its obligations under the Carlsbad Lease, Lineage provided
the landlord with a security deposit of $
Alameda Leases and Alameda Sublease
In
December 2015, Lineage entered into leases of office and laboratory space located in
| 27 |
In
April 2020, Lineage entered into a sublease with Industrial Microbes, Inc. (“Industrial Microbes”) for the use of
On
September 11, 2020, Lineage entered into a Lease Termination Agreement with the landlord terminating the Alameda Leases effective
as of August 31, 2020 for the 1020 Atlantic Premises and September 30, 2020 for the 1010 Atlantic Premises. In
consideration for the termination of the leases, Lineage paid a termination fee of $
Lineage
will continue to occupy approximately
Based
on the smaller footprint, and after taking into consideration the fees disclosed above, Lineage has reduced its contractual obligations
by approximately $
New York Leased Office Space
Lineage
currently pays $
Cell Cure Leases
Cell
Cure leases
On
January 28, 2018, Cell Cure entered into another lease agreement for an additional
| 28 |
In
December 2018, Cell Cure made a $
The below table provides supplemental cash flow information related to leases as follows (in thousands):
Nine Months Ended September 30, | ||||||||
| 2020 | 2019 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows from operating leases | $ | $ | ||||||
| Operating cash flows from financing leases | ||||||||
| Financing cash flows from financing leases | ||||||||
| Right-of-use assets obtained in exchange for lease obligations: | ||||||||
| Operating leases | ||||||||
| Financing leases | ||||||||
Supplemental balance sheet information related to leases is as follows (in thousands, except lease term and discount rate):
September 30, 2020 | December 31, 2019 | |||||||
| Operating leases | ||||||||
| Right-of-use assets, net | $ | $ | ||||||
| Right-of-use lease liabilities, current | ||||||||
| Right-of-use lease liabilities, noncurrent | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
| Financing leases | ||||||||
| Property and equipment, gross | $ | $ | ||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
| Current liabilities | $ | $ | ||||||
| Long-term liabilities | ||||||||
| Total finance lease liabilities | $ | $ | ||||||
| Weighted average remaining lease term | ||||||||
| Operating leases | ||||||||
| Finance leases | ||||||||
| Weighted average discount rate | ||||||||
| Operating leases | % | % | ||||||
| Finance leases | % | % | ||||||
| 29 |
Future minimum lease commitments are as follows as of September 30, 2020 (in thousands):
| Operating Leases | Finance Leases | |||||||
| Year Ending December 31, | ||||||||
| 2020 | $ | $ | ||||||
| 2021 | ||||||||
| 2022 | ||||||||
| 2023 | ||||||||
| 2024 | ||||||||
| Thereafter | ||||||||
| Total lease payments | $ | $ | ||||||
| Less imputed interest | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
The
Alameda Sublease is not included in the table above as it does not commence until October 1, 2020. Future minimum payments under
the Alameda Sublease are as follows: $
Research and Option Agreement
On
January 5, 2019, Lineage and Orbit Biomedical Limited (“Orbit”) entered into a Research and Option Agreement, which
was assigned by Orbit to Gyroscope Therapeutics, Limited (“Gyroscope”) and amended on May 7, 2019, January 30, 2020,
May 1, 2020 and September 4, 2020 (the “Gyroscope Agreement”). As amended, the Gyroscope Agreement provides Lineage
access to Gyroscope’s vitrectomy-free subretinal injection device (the “Orbit Device”) as a means of delivering
OpRegen in Lineage’s ongoing Phase 1/2a clinical trial through the earlier of: (i) December 1, 2020; or (ii) or treatment
of three additional patients with the Orbit Device between September 4, 2020 and December 1, 2020 (the “Access Period”).
Pursuant to the terms of the Gyroscope Agreement, Lineage paid access fees totaling $
Lineage has exclusive rights to the Gyroscope technology and its injection device for the delivery of retinal pigment epithelium cells for the treatment of dry AMD during the term of the Gyroscope Agreement.
Litigation
Lineage is subject to various claims and contingencies in the ordinary course of its business, including those related to litigation, business transactions, employee-related matters, and others. When Lineage is aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, Lineage will record a liability for the loss. If the loss is not probable or the amount of the loss cannot be reasonably estimated, Lineage will disclose the claim if the likelihood of a potential loss is reasonably possible and the amount involved could be material. Lineage is not aware of any claims likely to have a material adverse effect on its financial condition or results of operations.
On February 19, 2019, a putative shareholder class action lawsuit was filed (captioned Lampe v. Asterias Biotherapeutics, Inc. et al., Case No. RG19007391) in the Superior Court of the State of California, County of Alameda challenging the Asterias Merger. On March 1, 2019, Asterias made certain amendments and supplements to its public disclosures regarding the Asterias Merger (the “Supplemental Disclosures”). On May 3, 2019, an amended class action complaint (the “Amended Complaint”) was filed. The Amended Complaint named Lineage, Patrick Merger Sub, Inc., the Asterias board of directors, one member of Lineage’s board of directors, and certain stockholders of both Lineage and Asterias. The action was brought by two purported stockholders of Asterias, on behalf of a putative class of Asterias stockholders, and asserted breach of fiduciary duty and aiding and abetting claims under Delaware law. The Amended Complaint alleged, among other things, that the process leading up to the Asterias Merger was conflicted and inadequate, and that the proxy statement filed by Asterias with the Commission omitted certain material information, which allegedly rendered the information disclosed materially misleading. The Amended Complaint sought, among other things, that a class be certified, the recovery of monetary damages, and attorneys’ fees and costs.
| 30 |
On
June 3, 2019, defendants filed demurrers to the Amended Complaint. On August 13, 2019, the parties submitted a stipulation to
the court seeking dismissal of the action with prejudice as to the named Plaintiffs and without prejudice as to the unnamed putative
class members, and disclosing to the court the parties’ agreement to resolve, for $
On October 15, 2019, another putative class action lawsuit was filed challenging the Asterias Merger. This action (captioned Ross v. Lineage Cell Therapeutics, Inc., et al., C.A. No. 2019-0822) was filed in Delaware Chancery Court and names Lineage, the Asterias board of directors, one member of Lineage’s board of directors, and certain stockholders of both Lineage and Asterias as defendants. The action was brought by a purported stockholder of Asterias, on behalf of a putative class of Asterias stockholders, and asserts breach of fiduciary duty and aiding and abetting claims under Delaware law. The complaint alleges, among other things, that the process leading up to the Asterias Merger was conflicted, that the Asterias Merger consideration was inadequate, and that the proxy statement filed by Asterias with the Commission omitted certain material information, which allegedly rendered the information disclosed materially misleading. The complaint seeks, among other things, that a class be certified, the recovery of monetary damages, and attorneys’ fees and costs. On December 20, 2019, the defendants moved to dismiss the complaint. On February 10, 2020, the plaintiff filed an opposition. Defendants filed their replies on March 13, 2020. On June 23, 2020, a hearing on the motions to dismiss occurred. On September 21, 2020, the Chancery Court denied the motion to dismiss as to Lineage and certain members of the Asterias board of directors, and it granted the motion to dismiss as to all other defendants. On October 30, 2020, the remaining defendants filed an answer to the complaint.
Lineage believes the allegations in the action lack merit and intends to vigorously defend the claims asserted. It is impossible at this time to assess whether the outcome of this proceeding will have a material adverse effect on Lineage’s consolidated results of operations, cash flows or financial position. Therefore, in accordance with ASC 450, Contingencies, Lineage has not recorded any accrual for a contingent liability associated with this legal proceeding based on its belief that a liability, while possible, is not probable nor estimable, and any range of potential contingent liability amounts cannot be reasonably estimated at this time. Lineage records legal expenses as incurred.
Employment contracts
Lineage has entered into employment agreements with certain executive officers. Under the provisions of the agreements, Lineage may be required to incur severance obligations for matters relating to changes in control, as defined in the agreements, and involuntary terminations.
Indemnification
In the normal course of business, Lineage may provide indemnifications of varying scope under Lineage’s agreements with other companies or consultants, typically Lineage’s clinical research organizations, investigators, clinical sites, suppliers and others. Pursuant to these agreements, Lineage will generally agree to indemnify, hold harmless, and reimburse the indemnified parties for losses and expenses suffered or incurred by the indemnified parties arising from claims of third parties in connection with the use or testing of Lineage’s products and services. Indemnification provisions could also cover third party infringement claims with respect to patent rights, copyrights, or other intellectual property pertaining to Lineage products and services. The term of these indemnification agreements will generally continue in effect after the termination or expiration of the particular research, development, services, or license agreement to which they relate. The potential future payments Lineage could be required to make under these indemnification agreements will generally not be subject to any specified maximum amount. Historically, Lineage has not been subject to any claims or demands for indemnification. Lineage also maintains various liability insurance policies that provide Lineage with insurance against claims or demands for indemnification in specified circumstances. As a result, Lineage believes the fair value of these indemnification agreements is minimal. Accordingly, Lineage has not recorded any liabilities for these agreements as September 30, 2020 and December 31, 2019.
| 31 |
Second Amendment to Clinical Trial and Option Agreement and License Agreement with Cancer Research UK
On May 6, 2020, Lineage and its wholly owned subsidiary Asterias entered into a Second Amendment to Clinical Trial and Option Agreement (the “CTOA Amendment”) with Cancer Research UK (“CRUK”) and Cancer Research Technology Limited (“CRT”), which amends the Clinical Trial and Option Agreement entered into between Asterias, CRUK and CRT dated September 8, 2014, as amended September 8, 2014. Pursuant to the CTOA Amendment, Lineage assumed all obligations of Asterias and exercised early its option to acquire data generated in the Phase 1 clinical trial of VAC2 in non-small cell lung cancer being conducted by CRUK. CRUK will continue conducting the VAC2 study.
Lineage
and CRT effectuated the option by simultaneously entering into a license agreement (the “License Agreement”) pursuant
to which Lineage agreed to pay the previously agreed signature fee of £
Either party may terminate the License Agreement for the uncured material breach of the other party. CRT may terminate the License Agreement in the case of Lineage’s insolvency or if Lineage ceases all development and commercialization of all products under the License Agreement.
Second Amended and Restated License Agreement
On June 15, 2017, Cell Cure entered into a Second Amended and Restated License Agreement (the “License Agreement”) with Hadasit Medical Research Services and Development Ltd. (“Hadasit”), the commercial arm and a wholly owned subsidiary of Hadassah Medical Organization. Pursuant to the License Agreement, Hadasit granted Cell Cure an exclusive, worldwide, royalty bearing license (with the right to grant sublicenses) in its intellectual property portfolio of materials and technology related to human stem cell derived photoreceptor cells and retinal pigment epithelial cells (the “Licensed IP”), to use, commercialize and exploit any part thereof, in any manner whatsoever in the fields of the development and exploitation of: (i) human stem cell derived photoreceptor cells, solely for use in cell therapy for the diagnosis, amelioration, prevention and treatment of eye disorders; and (ii) human stem cell derived retinal pigment epithelial cells, solely for use in cell therapy for the diagnosis, amelioration, prevention and treatment of eye disorders.
As
consideration for the Licensed IP, Cell Cure will pay a small one-time lump sum payment, a royalty in the mid-single digits of
net sales from sales of Licensed IP by any invoicing entity, and a royalty of
Cell
Cure will pay Hadasit non-refundable milestone payments upon the recruitment of the first patient for the first Phase 2b clinical
trial, upon the enrollment of the first patient in the first Phase 3 clinical trials, upon delivery of the report for the first
Phase 3 clinical trials, upon the receipt of an NDA or marketing approval in the European Union, whichever is the first to occur,
and upon the first commercial sale in the United States or European Union, whichever is the first to occur. Such milestones, in
the aggregate, may be up to $
The License Agreement terminates upon the expiration of Cell Cure’s obligation to pay royalties for all licensed products, unless earlier terminated. In addition to customary termination rights of both parties, Hadasit may terminate the License Agreement if Cell Cure fails to continue the clinical development of the Licensed IP or fails to take actions to commercialize or sell the Licensed IP over any consecutive 12 month period. The License Agreement also contains mutual confidentiality obligations of Cell Cure and Hadasit, and indemnification obligations of Cell Cure.
| 32 |
Royalty obligations and license fees
Lineage
and its subsidiaries or affiliates are parties to certain licensing agreements with research institutions, universities and other
parties for the rights to use those licenses and other intellectual property in conducting research and development activities.
These licensing agreements provide for the payment of royalties by Lineage or the applicable party to the agreement on future
product sales, if any. In addition, in order to maintain these licenses and other rights during the product development, Lineage
or the applicable party to the contract must comply with various conditions including the payment of patent related costs and
annual minimum maintenance fees. Annual minimum maintenance fees are expected to be approximately $
Grants
Under the terms of the grant agreement between Cell Cure and Israel Innovation Authority (“IIA”) (formerly the Office of the Chief Scientist of Israel) of the Ministry of Economy and Industry, for the development of OpRegen, Cell Cure will be required to pay royalties on future product sales, if any, up to the amounts received from the IIA, plus interest indexed to LIBOR. Cell Cure’s research and product development activities under the grant are subject to substantial risks and uncertainties and performed on a best efforts basis. As a result, Cell Cure is not required to make any payments under the grant agreement unless it successfully commercializes OpRegen. Accordingly, pursuant to ASC 730-20, the grant is considered a contract to perform research and development services for others and grant revenue is recognized as the related research and development expenses are incurred (see Note 2).
Israeli law pertaining to such government grants contain various conditions, including substantial penalties and restrictions on the transfer of intellectual property, or the manufacture, or both, of products developed under the grant outside of Israel, as defined by the IIA.
16. Subsequent Events
Sales of Hadasit Marketable Equity Securities
In
October 2020, Lineage sold shares of its Hadasit common stock for gross proceeds of approximately $
| 33 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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, gross profit, 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 Lineage may elect to update forward-looking statements in the future, it specifically disclaims any obligation to do so, even if Lineage’s estimates change, and readers should not rely on those forward-looking statements as representing Lineage’s views as of any date subsequent to the date of the filing of this Report. Although we believe that the expectations reflected in these forward-looking statements are reasonable, such statements are inherently subject to risks and Lineage 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 Lineage. 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 in Part II, Item IA, “Risk Factors” of this Report and in Part I, Item 1A, “Risk Factors” in our most recent Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “Commission”) on March 12, 2020.
The following discussion should be read in conjunction with Lineage condensed consolidated interim financial statements and the related notes provided under “Item 1 - Financial Statements” above.
Company and Business Overview
Lineage is a clinical-stage biotechnology company developing novel cell therapies for unmet medical needs. Our focus is to develop therapies for degenerative retinal diseases, neurological conditions associated with demyelination, and aiding the body in detecting and combating cancer. Specifically, Lineage is testing therapies to treat dry age-related macular degeneration, spinal cord injuries, and non-small cell lung cancer. Lineage’s programs are based on our proprietary cell-based therapy platform and associated development and manufacturing capabilities. From this platform, Lineage develops and manufactures specialized, terminally or partially differentiated human cells from established and well-characterized pluripotent cell lines. These differentiated cells are transplanted into a patient either to replace or support cells that are dysfunctional or absent due to degenerative disease or traumatic injury, or are administered as a means of helping the body mount an effective immune response to cancer.
We have three allogeneic, or “off-the-shelf,” cell therapy programs in clinical development:
| ● | OpRegen®, a retinal pigment epithelium cell replacement therapy currently in a Phase 1/2a multicenter clinical trial for the treatment of advanced dry age-related macular degeneration (“AMD”) with geographic atrophy. There currently are no therapies approved by the U.S. Food and Drug Administration (“FDA”) for dry AMD, which accounts for approximately 85-90% of all AMD cases and is the leading cause of blindness in people over the age of 60. | |
| ● | OPC1, an oligodendrocyte progenitor cell therapy currently in a Phase 1/2a multicenter clinical trial for acute spinal cord injuries. This clinical trial has been partially funded by the California Institute for Regenerative Medicine. | |
| ● | VAC2, an allogeneic (non-patient-specific or “off-the-shelf”) cancer immunotherapy of antigen-presenting dendritic cells currently in a Phase 1 clinical trial in non-small cell lung cancer. This clinical trial is being funded and conducted by Cancer Research UK, the world’s largest independent cancer research charity. |
Lineage also is seeking to create value from additional assets, such as from patents or non-clinical candidates, including seeking to identify a commercialization or development partner for Renevia®. Renevia is a proprietary three-dimensional scaffold designed to support adipose tissue transplants that was granted a Conformité Européenne (“CE”) Mark in September 2019.
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We completed our merger (the “Asterias Merger”) with Asterias Biotherapeutics, Inc. (“Asterias”) on March 8, 2019, which incorporated OPC1 and VAC2 into our cell therapy product portfolio.
In addition to seeking to create value for shareholders by developing product candidates and other technologies through our clinical development programs, we also seek to create value from our technologies through partnering and strategic transactions. We founded two companies that later became publicly traded companies: OncoCyte Corporation (“OncoCyte”) and AgeX Therapeutics, Inc. (“AgeX”). We no longer hold any common stock in AgeX. The value of our OncoCyte holdings as of November 3, 2020, was approximately $5.6 million, based on the closing price of their common stock on that date. In this Report, see Part II, Item 1A, “Risk Factors—Risks Related to Our Business Operations and Capital Requirements—The value of our investments in public companies fluctuates based on their respective stock prices and could be negatively affected by poor business performance.”
Though our principal focus is on advancing our three cell therapy programs in clinical development, we may seek to create additional value through corporate transactions, as we have in the past. Our securities holdings also may be a significant source of capital to fund our operations as an alternative to issuing additional Lineage securities.
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 GAAP. Preparation of these 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 that are reasonably likely to occur could materially impact the financial statements. Management believes that there have been no significant changes 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, 2019, except as follows:
Business Combinations
We account for business combinations, such as the Asterias Merger completed in March 2019, in accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations, which requires the purchase price to be measured at fair value. When the purchase consideration consists entirely of our common shares, we calculate the purchase price by determining the fair value, as of the acquisition date, of shares issued in connection with the closing of the acquisition. We recognize estimated fair values of the tangible assets and intangible assets acquired, including in-process research and development (“IPR&D”), and liabilities assumed as of the acquisition date, and we record as goodwill any amount of the fair value of the tangible and intangible assets acquired and liabilities assumed in excess of the purchase price.
Goodwill and IPR&D
Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed. Goodwill is not amortized but is tested for impairment at least annually, or more frequently if circumstances indicate potential impairment.
IPR&D assets are indefinite-lived intangible assets until the completion or abandonment of the associated research and development (“R&D”) efforts. Once the R&D efforts are completed or abandoned, the IPR&D will either be amortized over the asset life as a finite-lived intangible asset or be impaired, respectively, in accordance with ASC 350, Intangibles - Goodwill and Other. In accordance with ASC 350, goodwill and acquired IPR&D are determined to have indefinite lives and, therefore, are not amortized. Instead, they are tested for impairment at least annually and between annual tests if we become aware of an event or a change in circumstances that would indicate the asset may be impaired.
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Leases
We account for leases in accordance with ASC 842, Leases. We determine if an arrangement is a lease at inception. Leases are classified as either financing or operating, with classification affecting the pattern of expense recognition in the consolidated statements of operations. Under the available practical expedients for the adoption of ASC 842, we account for the lease and non-lease components as a single lease component. We recognize right-of-use (“ROU”) assets and lease liabilities for leases with terms greater than twelve months in the condensed consolidated balance sheet.
ROU assets represent our right to use an underlying asset during the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Operating leases are included as right-of-use assets in property and equipment, and ROU lease liabilities, current and long-term, in the condensed consolidated balance sheets. Financing leases are included in property and equipment, and in financing lease liabilities, current and long-term, in the condensed consolidated balance sheets.
Going Concern Assessment
In accordance with Accounting Standards Update (“ASU”) 2014-15, Presentation of Financial Statements – Going Concern, we assess going concern uncertainty in our consolidated financial statements to determine if we have sufficient cash and cash equivalents on hand and working capital to operate for a period of at least one year from the date our consolidated financial statements are issued or are available to be issued, which is referred to as the “look-forward period” as defined by ASU No. 2014-15. As part of this assessment, based on conditions that are known and reasonably knowable to us, we will consider various scenarios, forecasts, projections, and estimates, and we will make certain key assumptions, including the timing and nature of projected cash expenditures or programs, and our ability to delay or curtail those expenditures or programs, if necessary, among other factors. Based on this assessment, as necessary or applicable, we make certain assumptions concerning our ability to curtail or delay research and development programs and expenditures to the extent we deem probable those implementations can be achieved and we have the proper authority to execute them within the look-forward period in accordance with ASU 2014-15.
Results of Operations
Comparison of Three and Nine Months Ended September 30, 2020 and 2019
Revenues and Cost of Sales
The amounts in the tables below show our consolidated revenues, by source, and cost of sales for the periods presented (in thousands).
Three Months Ended September 30, (unaudited) | $ Increase/ | % Increase/ | ||||||||||||||
| 2020 | 2019 | (Decrease) | (Decrease) | |||||||||||||
| Grant revenue | $ | 229 | $ | 350 | $ | (121 | ) | (35 | )% | |||||||
| Royalties from product sales and license fees | 342 | 164 | 178 | 109 | % | |||||||||||
| Sale of research products and services | - | 53 | (53 | ) | (100 | )% | ||||||||||
| Total revenues | 571 | 567 | 4 | 1 | % | |||||||||||
| Cost of sales | (102 | ) | (114 | ) | (12 | ) | (11 | )% | ||||||||
| Gross profit | $ | 469 | $ | 453 | $ | 16 | 4 | % | ||||||||
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Nine Months Ended September 30, (unaudited) | $ Increase/ | % Increase/ | ||||||||||||||
| 2020 | 2019 | (Decrease) | (Decrease) | |||||||||||||
| Grant revenue | $ | 864 | $ | 1,628 | $ | (764 | ) | (47 | )% | |||||||
| Royalties from product sales and license fees | 607 | 390 | 217 | 56 | % | |||||||||||
| Sale of research products and services | - | 256 | (256 | ) | (100 | )% | ||||||||||
| Total revenues | 1,471 | 2,274 | (803 | ) | (35 | )% | ||||||||||
| Cost of sales | (271 | ) | (289 | ) | (18 | ) | (6 | )% | ||||||||
| Gross profit | $ | 1,200 | $ | 1,985 | $ | (785 | ) | (40 | )% | |||||||
Our total revenues increased by $4,000 for the three months ended September 30, 2020 as compared to the same period in the prior year, primarily reflecting a $178,000 increase in royalties from product sales and license fees, offset by a $121,000 decrease in grant revenues due to less grant-related activities and a $53,000 decrease in the sale of research products and services due to the cessation of such sales.
Our total revenues decreased by $803,000 for the nine months ended September 30, 2020 as compared to the same period in the prior year, primarily reflecting a $764,000 decrease in grant revenues due to less grant-related activities and a $256,000 decrease in the sale of research products and services due to the cessation of such sales, offset by a $217,000 increase in royalties from product sales and license fees.
Our grant revenues are generated primarily by our subsidiary Cell Cure Neurosciences Ltd. (“Cell Cure”) from the Israel Innovation Authority (“IIA”) for the development of OpRegen® and from a Small Business Innovation Research grant from the National Institutes of Health for our vision restoration program (the “NIH grant”). NIH grant related activities were completed in the third quarter of 2020.
Grant revenues generated by Cell Cure from the IIA for the development of OpRegen amounted to $216,000 and $477,000 for the three and nine months ended September 30, 2020 and $277,000 and $1,193,000 for the three and nine months ended September 30, 2019, respectively.
Grant revenues generated by the NIH grant amounted to $13,000 and $387,000 for the three and nine months ended September 30, 2020 and $72,000 and $435,000 for the three and nine months ended September 30, 2019, respectively.
Royalties from product sales and license fees for the three and nine months ended September 30, 2020 included $200,000 recognized in September 2020 related to the expiration of an option granted by Asterias to Novo Nordisk A/S (“Novo Nordisk”) in September 2018 to license certain intellectual property. This amount was originally recorded as deferred revenue and subsequently recognized as revenue in September 2020, when the option period expired.
Operating expenses
The amounts in the tables below are our consolidated operating expenses for the periods presented (in thousands).
Three Months Ended September 30 (unaudited) | $ | % | ||||||||||||||
| 2020 | 2019 | (Decrease) | (Decrease) | |||||||||||||
| Research and development expenses | $ | 3,566 | $ | 4,266 | $ | (700 | ) | (16 | )% | |||||||
| General and administrative expenses | 3,628 | 4,609 | (981 | ) | (21 | )% | ||||||||||
Nine Months Ended September 30 (unaudited) | $ | % | ||||||||||||||
| 2020 | 2019 | (Decrease) | (Decrease) | |||||||||||||
| Research and development expenses | $ | 9,710 | $ | 14,462 | $ | (4,752 | ) | (33 | )% | |||||||
| General and administrative expenses | 12,055 | 19,527 | (7,472 | ) | (38 | )% | ||||||||||
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Research and development expenses
Research and development expenses consist of costs incurred for company-sponsored, collaborative and contracted research and development activities. These costs include direct and research-related overhead expenses including compensation and related benefits, stock-based compensation, consulting fees, research and laboratory fees, rent of research facilities, amortization of intangible assets, and license fees paid to third parties to acquire patents or licenses to use patents and other technology. We expense research and development costs as incurred. Research and development expenses incurred and reimbursed by grants from third parties approximate the grant income recognized in the consolidated statements of operations.
The following table shows the amount of our total research and development expenses allocated to our primary research and development projects for the periods presented (in thousands).
Three Months Ended September 30, (unaudited) | ||||||||||||||||
| Amount | Percent of Total | |||||||||||||||
| Program | 2020 | 2019 | 2020 | 2019 | ||||||||||||
| OpRegen® and other ophthalmic applications | $ | 1,066 | $ | 2,564 | 30 | % | 60 | % | ||||||||
| OPC1 | 576 | 1,425 | 16 | % | 34 | % | ||||||||||
| VAC platform | 1,871 | 45 | 52 | % | 1 | % | ||||||||||
| Renevia and all other | 53 | 232 | 2 | % | 5 | % | ||||||||||
| Total research and development expenses | $ | 3,566 | $ | 4,266 | 100 | % | 100 | % | ||||||||
Nine Months Ended September 30, (unaudited) | ||||||||||||||||
| Amount | Percent of Total | |||||||||||||||
| Program | 2020 | 2019 | 2020 | 2019 | ||||||||||||
| OpRegen® and other ophthalmic applications | $ | 4,323 | $ | 9,304 | 45 | % | 64 | % | ||||||||
| OPC1 | 2,947 | 3,937 | 30 | % | 27 | % | ||||||||||
| VAC platform | 2,167 | 286 | 22 | % | 2 | % | ||||||||||
| Renevia and all other | 273 | 935 | 3 | % | 7 | % | ||||||||||
| Total research and development expenses | $ | 9,710 | $ | 14,462 | 100 | % | 100 | % | ||||||||
The decrease of $0.7 million in total research and development expenses for the three months ended September 30, 2020 as compared to the same period in the prior year is mainly attributable to the following:
| ● | a decrease of $1.5 million in OpRegen and other ophthalmic application expenses, attributable primarily to a decrease in manufacturing activities in 2020 as compared to 2019, | |
| ● | a decrease of $0.8 million in OPC1 related expenses, primarily related to a return of unspent project funds of approximately $0.8 million from a former Asterias service provider, | |
| ● | a decrease of $0.2 million in Renevia and other related expenses as Renevia received a CE Mark in September 2019 and we are spending less on research activities as we are actively looking for a commercialization partner in Europe, offset by | |
| ● | an increase of $1.8 million in VAC program expenses, primarily related to the accrual of the signature fee of £1.25 million ($1.6 million) to Cancer Research UK related to our license agreement and our early exercise of the option to acquire data generated in the Phase 1 clinical trial of VAC2 in non-small cell lung cancer. |
The decrease of $4.8 million in total research and development expenses for the nine months ended September 30, 2020 as compared to the same period in the prior year is mainly attributable to the following:
| ● | a decrease of $5.0 million in OpRegen and other ophthalmic application expenses, attributable primarily to a decrease in manufacturing activities in 2020 as compared to 2019, | |
| ● | a decrease of $1.0 million in OPC1 related expenses, primarily related to return of unspent project funds of approximately $0.8 million from a former Asterias service provider, | |
| ● | a decrease of $0.7 million in Renevia and other related expenses as Renevia received a CE Mark in September 2019 and we are spending less on research activities as we are actively looking for a commercialization partner in Europe, offset by | |
| ● | an increase of $1.9 million in VAC program expenses, primarily related to the accrual of the signature fee of £1.25 million ($1.6 million) to Cancer Research UK. |
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General and administrative expenses
General and administrative expenses include employee and director compensation, consulting fees other than those paid for science-related consulting, facilities and equipment rent and maintenance related expenses, insurance costs allocated to general and administrative expenses, costs of patent applications, prosecution and maintenance, stock exchange-related costs, depreciation expense, marketing costs, legal and accounting costs, and other miscellaneous expenses which are allocated to general and administrative expense.
The total net decrease of $1.0 million in general and administrative expenses for the three months ended September 30, 2020 compared to the same period in 2019, was primarily attributable to a $0.9 million reduction in compensation expenses, a $0.2 million reduction in Asterias Merger related expenses, a $0.1 million reduction in travel expenses, a $0.1 million reduction in accounting expenses and a $0.1 million reduction in office related expenses, offset by a $0.3 million increase in patent and legal expenses and a $0.2 million increase related to the cessation of shared services reimbursements.
The total net decrease of $7.5 million in general and administrative expenses for the nine months ended September 30, 2020 compared to the same period in 2019, was primarily attributable to a $5.2 million reduction in Asterias Merger related expenses, a $1.9 million reduction in compensation costs, a $0.7 million reduction in accounting expenses, a $0.4 million reduction in travel expenses and a $0.3 million reduction in rent expenses, a $0.2 million reduction in office related expenses and a $0.1 million reduction in investor and public relations expenses, offset by a $0.9 million increase in legal and patent expenses and a $0.6 million increase related to the cessation of shared services reimbursements.
Other income and expenses, net
The following table shows the amount of other income and expenses, net, for the periods presented (in thousands):
Three Months Ended September 30, (unaudited) |
||||||||
| 2020 | 2019 | |||||||
| Other income and expenses, net | ||||||||
| Interest income, net | $ | 252 | $ | 399 | ||||
| Gain on sale of marketable securities | 120 | 2,055 | ||||||
| Unrealized loss on marketable equity securities | (2,003 | ) | (4,458 | ) | ||||
| Gain on sale of equity method investment in OncoCyte | - | 546 | ||||||
| Unrealized loss on equity method investment in OncoCyte at fair value | - | (8,287 | ) | |||||
| Unrealized gain on warrant liability | 55 | 79 | ||||||
| Other income, net | 351 | 582 | ||||||
| Total other expense, net | $ | (1,225 | ) | $ | (9,084 | ) | ||
Nine Months Ended September 30, (unaudited) |
||||||||
| 2020 | 2019 | |||||||
| Other income and expenses, net | ||||||||
| Interest income, net | $ | 1,037 | $ | 1,278 | ||||
| Gain on sale of marketable securities | 3,848 | 2,055 | ||||||
| Unrealized loss on marketable equity securities | (7,487 | ) | (3,134 | ) | ||||
| Gain on sale of equity method investment in OncoCyte | - | 546 | ||||||
| Unrealized gain on equity method investment in OncoCyte at fair value | - | 8,001 | ||||||
| Unrealized gain on equity method investment in Asterias at fair value | - | 6,744 | ||||||
| Unrealized gain on warrant liability | 84 | 350 | ||||||
| Other income, net | 175 | 2,270 | ||||||
| Total other (expense), income, net | $ | (2,343 | ) | $ | 18,110 | |||
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Interest income, net – During the three and nine months ended September 30, 2020, we earned $0.3 million and $1.0 million of interest income, respectively, from our promissory note with Juvenescence Limited (“Juvenescence”). During the three and nine months ended September 30, 2019, we earned $0.4 million and $1.1 million of interest income, respectively, from the same note.
Gain on equity method investment in Asterias – Prior to the closing of the Asterias Merger on March 8, 2019, we owned 21.7 million shares of common stock of Asterias, which we accounted for at fair value using the equity method of accounting. The fair value of our Asterias shares was approximately $20.2 million as of March 8, 2019, the closing date of the Asterias Merger, based on $0.93 per share, which was calculated by multiplying: (i) $1.31, the closing price of our common shares on such date; by (ii) the Merger Exchange Ratio. The fair value of our Asterias shares was approximately $13.5 million as of December 31, 2018, based on the closing price of Asterias common stock of $0.62 per share on such date. Accordingly, we recorded an unrealized gain of $6.7 million for the year ended December 31, 2019, representing the change in fair value of Asterias common stock from December 31, 2018 to March 8, 2019.
Gain on equity method investment in OncoCyte – Prior to September 11, 2019, Lineage elected to account for its shares of OncoCyte common stock at fair value using the equity method of accounting. Lineage sold 2.25 million shares of OncoCyte common stock for net proceeds of $4.2 million in July 2019. Accordingly, Lineage’s ownership in OncoCyte was reduced from 28% to 24%. Lineage sold an additional 4.0 million shares of OncoCyte common stock for net proceeds of $6.5 million on September 11, 2019. Lineage’s ownership in OncoCyte was further reduced to 16% at this time. Effective September 11, 2019, Lineage began accounting for its shares of OncoCyte common stock as marketable equity securities.
As of December 31, 2019, Lineage had 8.4 million shares of OncoCyte common stock. These shares had a fair value of $19.0 million, based on the closing price of OncoCyte common stock of $2.25 per share on December 31, 2019.
As of September 30, 2020, Lineage owned 3.6 million shares of OncoCyte common stock. These shares had a fair value of $5.0 million, based on the closing price of OncoCyte common stock of $1.39 per share on September 30, 2020.
For the three months ended September 30, 2020, Lineage recorded an unrealized loss of $1.9 million related to the shares remaining at September 30, 2020 and the decrease in OncoCyte’s stock price from $1.91 at June 30, 2020 to $1.39 at September 30, 2020. For the three months ended September 30, 2019, Lineage recorded a realized gain of $0.6 million due to sales of OncoCyte shares in the period. Lineage also recorded an unrealized loss of $8.7 million due to the decrease in OncoCyte’s stock price from $2.49 per share at June 30, 2019 to $2.10 per share at September 30, 2019. $8.3 million of the unrealized loss was recorded as an unrealized loss on an equity method investment as it was prior to September 11, 2019; the remaining $0.4 million was recorded as an unrealized loss on marketable equity securities.
For the nine months ended September 30, 2020, Lineage recorded a realized gain of $3.1 million due to sales of OncoCyte shares in the period. In the same period, Lineage also recorded an unrealized loss of $6.1 million related to its OncoCyte shares. The unrealized loss is comprised of $3.7 million related to the difference between the book cost basis of OncoCyte shares sold in the period versus the applicable prior month’s ending OncoCyte stock price and an additional $2.4 million related to the shares remaining at September 30, 2020 and the decrease in OncoCyte’s stock price from $2.25 at December 31, 2019 to $1.39 at September 30, 2020. For the nine months ended September 30, 2019, Lineage recorded a realized gain of $0.6 million due to sales of OncoCyte shares in the period. Lineage also recorded an unrealized gain of $7.6 million due to the increase in OncoCyte’s stock price from $1.38 per share at December 31, 2018 to $2.10 per share at September 30, 2019. $8.0 million of the unrealized gain was recorded as an unrealized gain on an equity method investment as it was prior to September 11, 2019; the remaining $0.4 million was recorded as an unrealized loss on marketable equity securities.
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All share prices are determined based on the closing price of OncoCyte common stock on the NYSE American on the applicable dates, or the last day of trading of the applicable quarter, if the last day of a quarter fell on a weekend.
We expect our other income and expenses, net, to continue to fluctuate each reporting period based on the changes in the market price of our OncoCyte shares, which could significantly impact our net income or loss reported in our condensed consolidated statements of operations for each period.
Marketable equity securities - We also account for the shares we held in Hadasit Bio-Holdings (“HBL”) and AgeX as of September 30, 2020 as marketable equity securities, carried at fair market value on our consolidated balance sheets. For the three and nine months ended September 30, 2020, Lineage recorded realized gains of $0.1 million and $0.7 million, respectively, due to sales of AgeX shares in the period. Sales of HBL securities were negligible. For the three and nine months ended September 30, 2019, Lineage recorded a realized gain of $2.0 million due to sales of HBL and AgeX shares in the period.
For the three and nine months ended September 30, 2020, we recorded unrealized losses of $0.1 million and $1.4 million, respectively. For the three months ended September 30, 2020, a majority of the unrealized loss was related to the difference between the book cost basis of AgeX shares sold in the period versus the applicable prior month’s ending AgeX stock price. For the nine months ended September 30, 2020, $0.5 million of the unrealized loss was related to the difference between the book cost basis of AgeX shares sold in the period versus the applicable prior month’s ending AgeX share price and an additional $0.8 million was related to the AgeX shares remaining at September 30, 2020 and the decrease in AgeX’s stock price from $1.82 at December 31, 2019 to $0.81 at September 30, 2020.
For the three and nine months ended September 30, 2019, we recorded an unrealized loss of $4.0 million and $2.7 million, respectively, due to changes in fair market value of these marketable equity securities from June 30, 2019 to September 30, 2019 and December 31, 2018 to September 30, 2019.
Other income (expense), net - Other income (expense), net, in 2020 and 2019 consist primarily of net foreign currency transaction gains and losses recognized by our subsidiaries Cell Cure and ES Cell International Pte. Ltd. (“ESI”), changes in the fair value of warrants issued by Cell Cure, dividend income and interest income, net. Foreign currency transaction gains and losses for the periods presented are principally related to the remeasurement of the U.S. dollar denominated notes payable by Cell Cure to Lineage.
Income Taxes
The market value of the shares of OncoCyte common stock we hold creates a deferred tax liability based on the closing prices of the shares, less our tax basis in the shares. The deferred tax liability generated by the OncoCyte shares that we hold as of September 30, 2020, is a source of future taxable income to us, as prescribed by ASC 740-10-30-17, that will more likely than not result in the realization of our deferred tax assets to the extent of the deferred tax liability. This deferred tax liability is determined based on the closing prices of the OncoCyte shares as of September 30, 2020. Due to the inherent unpredictability of future prices of those shares, we cannot reliably estimate or project those deferred tax liabilities on an annual basis. Therefore, the deferred tax liability pertaining to OncoCyte shares, determined based on the actual closing prices on the last stock market trading day of the applicable accounting period, and the related impacts to the valuation allowance and deferred tax asset changes, are recorded in the accounting period in which they occur.
In connection with the Asterias Merger, a deferred tax liability of $10.8 million was recorded as part of the acquisition accounting (see Note 3). The deferred tax liability (“DTL”) is related to fair value adjustments for the assets and liabilities acquired in the Asterias Merger, principally consisting of IPR&D. This estimate of deferred taxes was determined based on the excess of the estimated fair values of the acquired assets and liabilities over the tax basis of the assets and liabilities acquired. The statutory tax rate was applied, as appropriate, to the adjustment based on the jurisdiction in which the adjustment is expected to occur. Because the IPR&D (prior to completion or abandonment of the R&D) is considered an indefinite-lived asset for accounting purposes, the fair value of the IPR&D on the acquisition date creates a deferred income tax liability in accordance with ASC 740. This DTL is computed using the fair value of the IPR&D assets on the acquisition date multiplied by Lineage’s respective federal and state income tax rates. While this DTL would reverse on impairment or sale or commencement of amortization of the related intangible assets, those events are not anticipated under ASC 740 for purposes of predicting reversal of a temporary difference to support the realization of deferred tax assets, except for certain deferred tax assets and credit carryforwards that are also indefinite in nature as of the Asterias Merger date, which may be considered for reversal under ASC 740 as further discussed below.
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A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. Lineage established a full valuation allowance as of December 31, 2018 due to the uncertainty of realizing future tax benefits from its net operating loss carryforwards and other deferred tax assets, including foreign net operating losses generated by its subsidiaries. During the year ended December 31, 2019, a portion of the valuation allowance was released as it relates to Lineage’s indefinite lived assets that can be used against the indefinite lived liabilities. The amount of the valuation allowance released was $7.4 million; as new indefinite lived deferred tax assets are generated, we will continue to book provision benefits until the deferred tax liability position is exhausted, barring any new developments.
For the three and nine months ended September 30, 2019, Lineage recorded a $1.0 million and $6.6 million valuation allowance release and corresponding benefit for income taxes.
For the three and nine months ended September 30, 2020, Lineage recorded a $0.2 million deferred tax benefit for income taxes.
We expect that deferred income tax expense or benefit we record each reporting period, if any, will vary depending on the change in the closing stock prices of OncoCyte shares from period to period and the related changes in those deferred tax liabilities and our deferred tax assets and other credits, including changes in the valuation allowance, for each period.
See Note 3 to our consolidated financial statements included elsewhere in this Report for a description of the Asterias Merger that was completed on March 8, 2019. We have concluded that an ownership change did occur after the Asterias Merger, and the acquired operating loss carryforwards are subject to limitation under Section 382 of the Internal Revenue Service Code; Lineage will only be able to utilize $52.8 million of these operating loss carryforwards.
Liquidity and Capital Resources
At September 30, 2020, we had $38.0 million of cash, cash equivalents and marketable equity securities on hand, which includes our investments in HBL, AgeX and OncoCyte. We may use our marketable equity securities for liquidity, as necessary, and as market conditions allow. The market value may not represent the amount that could be realized in a sale of investment shares due to various market and regulatory factors, including trading volume or market depth factors and volume and manner of sale restrictions under Federal securities laws, prevailing market conditions and prices at the time of any sale, and subsequent sales of securities by the entities. In addition, the value of our marketable equity securities may be significantly and adversely impacted by deteriorating global economic conditions and the recent disruptions to and volatility in the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic.
Since inception, we have incurred significant operating losses and have funded our operations primarily through the issuance of equity securities, the sale of common stock of our former subsidiaries, AgeX and OncoCyte, payments from research grants, royalties from product sales and sales of research products and services. At September 30, 2020, we had an accumulated deficit of $296.1 million, working capital of $32.0 million and shareholders’ equity of $90.2 million. We evaluated the projected cash flows for Lineage and our subsidiaries, and we believe that our $38.0 million in cash, cash equivalents and marketable equity securities provide sufficient cash, cash equivalents, and liquidity to carry out our current planned operations through at least twelve months from the issuance date of our condensed consolidated interim financial statements included elsewhere in this Report. If we need near term working capital or liquidity to supplement our cash and cash equivalents for our operations, we may sell some, or all, of our investments, as necessary.
On March 8, 2019, the Asterias Merger closed and Asterias became our wholly owned subsidiary. We began consolidating Asterias’ operations and results with our operations and results beginning on March 8, 2019. We have made extensive reductions in headcount and reduced non-clinical related spend, in each case, as compared to Asterias’ operations before the merger. We have implemented significant cost savings initiatives and anticipate reduced operational spend in 2020 compared to prior periods.
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The COVID-19 pandemic has impacted patient enrollment in our OpRegen Phase 1/2a multicenter clinical trial and the VAC2 Phase 1 multicenter clinical trial. In particular, we saw sites pause enrollment to focus on, and direct resources to, the COVID-19 pandemic. Additionally, patients may choose not to enroll or continue participating in clinical trials as a result of the pandemic. At this point in time, the majority of our sites are back up and enrolling. We are unable to predict with confidence if there will be future patient enrollment delays and difficulties as the COVID-19 pandemic continues. If patient enrollment is delayed for an extended period of time, such clinical trials could be delayed or otherwise adversely affected. Our inability to enroll a sufficient number of patients for any of our current or future clinical trials could result in significant delays.
We may increase spending later in the year to accelerate clinical trial activities and try to mitigate the impact of the COVID-19 related enrollment delays.
Our projected cash flows are subject to various risks and uncertainties, and the unavailability or inadequacy of financing to meet future capital needs could force us to modify, curtail, delay, or suspend some or all aspects of our current planned operations. Our determination as to when we will seek new financing and the amount of financing that we will need will be based on our evaluation of the progress we make in our research and development programs, any changes to the scope and focus of those programs, any changes in grant funding for certain of those programs, and projection of future costs, revenues, and rates of expenditure. Our ability to raise additional funds may be adversely impacted by deteriorating global economic conditions and the disruptions to and volatility in the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic. We may be required to delay, postpone, or cancel our clinical trials or limit the number of clinical trial sites, unless we are able to obtain adequate financing. We cannot assure that adequate financing will be available on favorable terms, if at all. Sales of additional equity securities by us or our subsidiaries and affiliates could result in the dilution of the interests of our current shareholders.
Cash flows used in operating activities
Net cash used in operating activities of $14.1 million for the nine months ended September 30, 2020 primarily reflects the loss from operations of $20.6 million less the changes in assets and liabilities of $2.0 million. These items were offset primarily by non-cash expenses of $1.8 million of depreciation and amortization and $1.7 million for stock-based compensation. The unrealized loss on marketable securities and deferred tax benefit are non-cash items that had no effect on cash flows.
Net cash used in operating activities of $26.4 million for the nine months ended September 30, 2019 primarily reflects the loss from operations of $32.0 million less the changes in assets and liabilities of $1.3 million. These items were offset primarily by non-cash expenses of $3.0 million for stock-based compensation and $2.3 million of depreciation and amortization. The unrealized gains on equity method investments and marketable securities and deferred tax benefit are non-cash items that had no effect on cash flows.
Cash flows provided by investing activities
Cash provided by investing activities of $12.1 million for the nine months ended September 30, 2020 was associated primarily with receipts of $10.9 million from sales of a portion of our OncoCyte holdings and $1.2 million in sales of a portion of our AgeX holdings.
Cash provided by investing activities of $16.2 million for the nine months ended September 30, 2019 was associated primarily with receipts of $10.7 million from sales of a portion of our OncoCyte holdings, $1.6 million in sales of a portion of our AgeX holdings and $1.2 million in sales of a portion of our HBL holdings as well as the receipt of $3.1 million of cash that Asterias had on the closing date of the Asterias Merger, offset by $0.4 million in purchases of equipment and other assets.
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Cash flows provided by financing activities
Cash provided by financing activities of $25.1 million for the nine months ended September 30, 2020 was associated primarily with proceeds of $24.6 million from payment of the Juvenescence promissory note and proceeds of $0.5 million from a Paycheck Protection Program (“PPP”) loan under the Coronavirus Aid, Relief and Economic Security (“CARES”) Act.
Cash provided by financing activities of $0.6 million for the nine months ended September 30, 2019 was associated primarily with $0.7 million in landlord reimbursements for tenant improvements, offset by $0.1 million in common shares received and retired for employee taxes paid.
Off-Balance Sheet Arrangements
As of September 30, 2020 and December 31, 2019, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Commission Regulation S-K.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Under Commission rules and regulations, as a smaller reporting company, we are not required to provide the information required by this item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
It is management’s responsibility to establish and maintain adequate internal control over all financial reporting pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (“Exchange Act”). Our management, including our principal executive officer and our principal financial officer, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Report. Following this review and evaluation, management collectively determined that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act: (i) is recorded, processed, summarized and reported within the time periods specified in Commission rules and forms; and (ii) is accumulated and communicated to management, including our chief executive officer and our chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the period covered by this Report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The information required by this Item is incorporated herein by reference to Notes to Condensed Consolidated Interim Financial Statements—Note 15. “Commitments and Contingencies” under the heading “Litigation,” in Part I, Item 1, of this Report.
From time-to-time we may be involved in a variety of claims or litigation proceedings. Such proceedings may initially be viewed as immaterial but could later prove to be material. Litigation proceedings are inherently unpredictable and excessive verdicts do occur. Given the inherent uncertainties in litigation, even when we can reasonably estimate the amount of possible loss or range of loss and reasonably estimable loss contingencies, the actual outcome may change in the future due to new developments or changes in approach. In addition, such claims or litigation proceedings could involve significant expense and diversion of management’s attention and resources from other matters.
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Item 1A. Risk Factors
An investment in our common shares involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this Quarterly Report on Form 10-Q, before deciding whether to purchase, hold or sell our common shares. The occurrence of any of the following risks could harm our business, financial condition, results of operations and/or growth prospects or cause our actual results to differ materially from those contained in forward-looking statements we have made in this Quarterly Report on Form 10-Q and those we may make from time to time. You should consider all of the risk factors described when evaluating our business. We have marked with an asterisk (*) those risk factors that reflect changes from the similarly titled risk factors included in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as filed with the Commission on March 12, 2020.
Risks Related to Our Business Operations and Capital Requirements
We have incurred operating losses since inception, and we do not know if or when we will attain profitability.*
Our total operating losses for the fiscal year ended December 31, 2019 were $38.9 million and our total operating losses for the nine months ended September 30, 2020 were $20.6 million and we had an accumulated deficit of $296.1 million as of September 30, 2020. Since inception, we have incurred significant operating losses and have funded our operations primarily through sales of our equity securities and the equity securities of former subsidiaries, receipt of research grants, royalties on product sales, license revenues, sales of research products, and revenues from subscription fees and advertising revenue from database products of a former subsidiary. Substantially all of our losses have resulted from expenses incurred in connection with our research and development programs and from general and administrative costs associated with our operations. All of our product candidates will require substantial additional development time and resources before we would be able to apply for or receive regulatory approvals. We expect to continue to incur losses for the foreseeable future, and we anticipate these losses will increase substantially as we continue our development of, seek regulatory approval for and potentially commercialize any of our product candidates and seek to identify, assess, acquire, in-license or develop additional product candidates.
To become and remain profitable, we must succeed in developing and eventually commercializing products that generate significant revenue. This will require us to be successful in a range of challenging activities, including completing clinical trials and preclinical trials of our product candidates, obtaining regulatory approval for these product candidates and manufacturing, marketing and selling any products for which we may obtain regulatory approval. In addition, we are attempting to develop new medical products and technology. We may never succeed in these activities and, even if we do, may never generate revenues that are significant enough to achieve profitability.
We will continue to spend a substantial amount of our capital on research and development, but we might not succeed in developing products and technologies that are useful in medicine.*
We are attempting to develop new medical products and technology. These new products and technologies might not prove to be safe and efficacious in the human medical applications for which they are being developed. Our research and development activities are costly, time consuming, and their results are uncertain. We incurred research and development expenses amounting to approximately $9.7 million during the nine months ended September 30, 2020, and $17.9 million during the fiscal year ended December 31, 2019. If we successfully develop a new technology or product, refinement of the new technology or product and definition of the practical applications and limitations of the technology or product may take years and require large sums of money. Clinical trials of new therapeutic products, particularly those products that are regulated as biologics, drugs, or devices, are very expensive and take years to complete. We may not have the financial resources to fund clinical trials on our own and we may have to enter into licensing or collaborative arrangements with others. Any such arrangements may be dilutive to our ownership or economic interest in the products we develop, and we might have to accept royalty payments on product sales rather than receiving the gross revenues from product sales. In addition, we may discontinue one or more of the research or product development programs. Our product and technology development programs may be delayed or discontinued should adequate funding on acceptable terms not be available.
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The amount and pace of research and development work that we can do or sponsor, and our ability to commence and complete clinical trials required to obtain regulatory approval to market our therapeutic and medical device products, depends upon the amount of funds we have.*
At September 30, 2020, we had $38.0 million of cash, cash equivalents and marketable equity securities. There can be no assurance that we will be able to raise additional funds on favorable terms or at all, or that any funds raised will be sufficient to permit us to develop and market our products and technology, if and when approved. Our ability to raise additional funds may be adversely impacted by deteriorating global economic conditions and the disruptions to and volatility in the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic. Unless we are able to generate sufficient revenue or raise additional funds when needed, it is likely that we will be unable to continue our planned activities, even if we make progress in our research and development projects. We may have to postpone or limit the pace of our research and development work and planned clinical trials of our product candidates unless our cash resources increase through a growth in revenues, royalties, license fees, equity financings or borrowings.
We will need to issue additional equity or debt securities in order to raise additional capital needed to pay our operating expenses.*
We expect to continue to incur substantial research and product development expenses and will need to raise additional capital to pay operating expenses until we are able to generate sufficient revenues from product sales, royalties and license fees. Our ability to raise additional equity or debt capital will depend, not only on progress made in developing new products and technologies, but also on access to capital and conditions in the capital markets. We believe that our cash, cash equivalents and marketable securities as of September 30, 2020 will be sufficient to fund our planned operations for at least the next 12 months. We have based these estimates on assumptions that may prove to be wrong, and we may use our capital resources sooner than we currently expect. Our operating plans and other demands on our cash resources may change as a result of many factors currently unknown to us, and we may need to seek additional funds sooner than planned. Any equity capital raise could result in the dilution of the interests of shareholders or may otherwise limit our ability to finance further in the future, which may negatively impact our business and operations. Any debt capital financing may involve covenants that restrict our operations, including limitations on additional borrowing and on the use of our assets. If we raise capital through licensing arrangements, it may be necessary to grant licenses on terms that are not favorable to us. There can be no assurance that we will be able to raise capital on favorable terms, or at all, or at times and in amounts needed to successfully finance product development, clinical trials, and general operations.
Lawsuits have been filed and other lawsuits may be filed against Lineage and certain members of the Lineage and Asterias Biotherapeutics, Inc. (“Asterias”) boards of directors relating to our acquisition of Asterias (the “Asterias Merger”). An adverse ruling in any such lawsuit may result in additional payments and costs.*
A putative class action lawsuit alleging breach of fiduciary duties in connection with the Asterias Merger is pending in the Delaware Chancery Court. As of September 30, 2020, the defendants are certain former members of Asterias’ board of directors and Lineage. The complaint alleges that the merger process was conflicted, that the consideration was inadequate, and that the proxy statement filed by Asterias was misleading. The complaint seeks, among other things, certification of a class, rescission of the merger or monetary damages, and attorneys’ fees and costs.
The defendants specifically deny all allegations in the litigation and intend to defend it vigorously. However, any adverse ruling in this case could result in additional payments. Additional lawsuits arising out of or relating to the merger agreement and/or the merger may be filed in the future.
Changes in tax laws or regulations that are applied adversely to us or our customers may have a material adverse effect on our business, cash flow, financial condition or results of operations.*
New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time, which could adversely affect our business operations and financial performance. Further, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to us. For example, legislation enacted in 2017, informally known as the Tax Cuts and Jobs Act (the “2017 Tax Act”), enacted many significant changes to the U.S. tax laws. Future guidance from the Internal Revenue Service and other tax authorities with respect to the 2017 Tax Act may affect us, and certain aspects of the 2017 Tax Act could be repealed or modified in future legislation. For example, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) modified certain provisions of the 2017 Tax Act. In addition, it is uncertain if and to what extent various states will conform to the 2017 Tax Act, the CARES Act, or any newly enacted federal tax legislation. Changes in corporate tax rates, the realization of net deferred tax assets relating to our operations, the taxation of foreign earnings, and the deductibility of expenses under the 2017 Tax Act or future reform legislation could have a material impact on the value of our deferred tax assets, could result in significant one-time charges, and could increase our future U.S. tax expense.
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Our ability to use net operating losses to offset future taxable income may be subject to limitations.*
As of December 31, 2019, we had net operating loss (“NOL”) carryforwards for U.S. federal and state tax purposes of approximately $164.0 million and $110.5 million, respectively. Included in these amounts are NOLs acquired through the merger with Asterias (see below). A portion of the federal and state NOL carryforwards will begin to expire, if not utilized, in varying amounts between 2027 and 2039. NOLs that expire unused will be unavailable to offset future income tax liabilities. Under federal income tax law, federal NOLs incurred in 2018 and in future years may be carried forward indefinitely. It is uncertain if and to what extent various states that we may operate in will conform to the federal tax law. In addition, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “IRC”), and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50% change, by value, in its equity ownership over a three-year period, the corporation’s ability to use its pre-change NOL carryforwards and other pre-change tax attributes to offset its post-change income or taxes may be limited. We may experience ownership changes in the future as a result of subsequent shifts in our stock ownership, some of which may be outside of our control. If an ownership change occurs and our ability to use our NOL carryforwards is materially limited, it would harm our future operating results by effectively increasing our future tax obligations. In addition, at the state level, there may be periods during which the use of net operating loss carryforwards is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed.
As part of the merger with Asterias, we acquired various tax attribute carryforwards including federal and California NOLs of $52.8 million and $41.9 million, respectively, as well as California research and development credits of $2.4 million. As a result of the merger, Asterias incurred an ownership change under Section 382 of the Internal Revenue Service Code, which places annual limits on the amount of these NOLs that are available to offset income. Because of the annual limitation, the total amount of these NOLs are not immediately available to offset future income. The California research and development credit of $2.4 million has no expiration.
Taxing authorities could reallocate our taxable income among our subsidiaries, which could increase our overall tax liability.
We are organized in the United States, and currently have subsidiaries in Israel and Singapore. If we succeed in growing our business, we expect to conduct increased operations through subsidiaries in various tax jurisdictions pursuant to transfer pricing arrangements between us and our subsidiaries. If two or more affiliated companies are located in different countries, the tax laws or regulations of each country generally will require that such arrangements be priced the same as those between unrelated companies dealing at arm’s length and that appropriate documentation is maintained to support the value of such arrangements, or Transfer Pricing Regulations. Our transfer pricing policies were formulated with the assistance of third-party experts. We are in the process of obtaining a formal transfer pricing report. However, after we receive such report, we do not intend to amend our returns for prior years. Whether we obtain a formal transfer pricing study with outside experts or not, our transfer pricing procedures will not be binding on applicable tax authorities.
If tax authorities in any of these countries were to successfully challenge our transfer prices as not reflecting arm’s length transactions, they could require us to adjust our transfer prices and thereby reallocate our income to reflect these revised transfer prices, which could result in a higher tax liability to us. In addition, if the country from which the income is reallocated does not agree with the reallocation, both countries could tax the same income, resulting in double taxation. If tax authorities were to allocate income to a higher tax jurisdiction, subject our income to double taxation or assess interest and penalties, it would increase our tax liability, which could adversely affect our financial condition, results of operations and cash flows.
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Our business and operations could suffer in the event of system failures.
Despite the implementation of security measures, our internal computer systems and those of our contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters including earthquakes and tsunamis, terrorism, war, and telecommunication and electrical failures. Such events could cause significant interruption of our operations and development programs. For example, the loss of data for our product candidates could result in delays in our regulatory filings and development efforts and significantly increase our costs. To the extent that any disruption or security breach was to result in a loss of or damage to our data, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the development of our product candidates could be delayed.
In addition, our product candidates are manufactured by starting with cells that are stored in a cryopreserved master cell bank. While we believe we have adequate backup should any cell bank be lost in a catastrophic event, we or our third-party suppliers and manufacturers could lose multiple cell banks, which would severely affect our manufacturing activities. We cannot assure you that any stability or other issues relating to the manufacture of any of our product candidates or products will not occur in the future. Any delay or interruption in the supply of clinical trial supplies could delay the completion of planned clinical trials, increase the costs associated with maintaining clinical trial programs and, depending upon the period of delay, require us to commence new clinical trials at additional expense or terminate clinical trials completely. Any adverse developments affecting clinical or commercial manufacturing of our product candidates or products may result in shipment delays, inventory shortages, lot failures, product withdrawals or recalls or other interruptions in the supply of our product candidates or products. Accordingly, failures or difficulties faced at any level of our supply chain could adversely affect our business and delay or impede the development and commercialization of any of our product candidates or products and could have an adverse effect on our business, prospects, financial condition and results of operations.
Significant disruptions of information technology systems or data security breaches could adversely affect our business.
We are increasingly dependent on information technology systems and infrastructure to operate our business. In the ordinary course of our business, we collect, store, process and transmit large amounts of confidential information, including intellectual property, proprietary business information and personal information. It is critical that we do so in a secure manner to maintain the confidentiality, integrity and availability of such information. We have also outsourced some of our operations (including parts of our information technology infrastructure) to a number of third-party vendors who may have, or could gain, access to our confidential information. In addition, many of those third parties, in turn, subcontract or outsource some of their responsibilities to third parties.
Our information technology systems are large and complex and store large amounts of confidential information. The size and complexity of these systems make them potentially vulnerable to service interruptions or to security breaches from inadvertent or intentional actions by our employees, third party vendors and/or business partners, or from cyber-attacks by malicious third parties. Attacks of this nature are increasing in frequency, persistence, sophistication and intensity, and are being conducted by sophisticated and organized groups and individuals with a wide range of motives (including, but not limited to, industrial espionage) and expertise, including organized criminal groups, “hacktivists,” nation states and others. In addition to the extraction of important information, such attacks could include the deployment of harmful malware, ransomware, denial-of-service attacks, social engineering and other means to affect service reliability and threaten the confidentiality, integrity and availability of our information. Although the aggregate impact on our operations and financial condition has not been material to date, we have been the target of events of this nature and expect them to continue.
Significant disruptions of our, our third party vendors’ and/or business partners’ information technology systems or security breaches could adversely affect our business operations and/or result in the loss, misappropriation, and/or unauthorized access, use or disclosure of, or the prevention of access to, confidential information (including trade secrets or other intellectual property, proprietary business information and personal information), and could result in financial, legal, business and reputational harm to us. Any such event that leads to unauthorized access, use or disclosure of personal information, including personal information regarding our patients or employees, could harm our reputation, compel us to comply with federal and/or state breach notification laws and foreign law equivalents, subject us to mandatory corrective action, require us to verify the correctness of database contents and otherwise subject us to liability under laws and regulations that protect the privacy and security of personal information, which could disrupt our business, result in increased costs or loss of revenue, and/or result in significant legal and financial exposure. In addition, security breaches and other inappropriate access can be difficult to detect, and any delay in identifying them may further harm us. Moreover, the prevalent use of mobile devices to access confidential information increases the risk of security breaches. While we have implemented security measures to protect our information technology systems and infrastructure, there can be no assurance that such measures will prevent service interruptions or security breaches that could adversely affect our business. In addition, failure to maintain effective internal accounting controls related to security breaches and cybersecurity in general could impact our ability to produce timely and accurate financial statements and subject us to regulatory scrutiny.
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Our business could be adversely affected if we lose the services of the key personnel upon whom we depend or if we fail to attract senior management and key scientific personnel.
We believe that our continued success depends to a significant extent upon our efforts and ability to retain highly qualified personnel, including our Chief Executive Officer, Brian Culley. All of our officers and other employees are at-will employees and may terminate their employment with us at any time with no advance notice. The loss of the services of Mr. Culley or other members of our senior management could have a material adverse effect on us. Further, the replacement of any of such individuals likely would involve significant time and costs and may significantly delay or prevent the achievement of our business and clinical objectives and would harm our business.
In addition, we could experience difficulties attracting qualified employees in the future. For example, competition for qualified personnel in the biotechnology and medical device field is intense due to the limited number of individuals who possess the skills and experience required by our industry. We will need to hire additional personnel, including experienced sales representatives, as we expand our clinical development and commercial activities. We may not be able to attract quality personnel on acceptable terms, or at all. In addition, to the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited or that they have divulged proprietary or other confidential information or that their former employers own their research output.
The value of our investments in public companies fluctuates based on their respective stock prices and could be negatively affected by business, regulatory and other risks applicable to them.*
As of September 30, 2020, we had equity investments in two U.S. publicly traded companies, OncoCyte and AgeX. As of September 30, 2020, the value of our investments in OncoCyte and AgeX was approximately $5.0 million and $41,000, respectively, based on their closing stock prices as of that date. If these companies were to have delays in clinical trials or commercialization activities or otherwise realize the specific business, regulatory and other risks applicable to them, the value of their common stock and the valuation of our investment could be negatively affected. If these companies were to fail and ultimately cease operations, we may lose the entire value of our investments. In addition, the value of our marketable equity securities may be significantly and adversely impacted by deteriorating global economic conditions and the disruptions to and volatility in the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic.
Failure of our internal control over financial reporting could harm our business and financial results.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Our growth and entry into new products, technologies and markets will place significant additional pressure on our system of internal control over financial reporting. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud. Operating our business through subsidiaries, some of which are located in foreign countries, also adds to the complexity of our internal control over financial reporting and adds to the risk of a system failure, an undetected improper use or expenditure of funds or other resources by a subsidiary, or a failure to properly report a transaction or financial results of a subsidiary. We allocate certain expenses among Lineage itself and one or more of our subsidiaries, which creates a risk that the allocations we make may not accurately reflect the benefit of an expenditure or use of financial or other resources by Lineage as the parent company and the subsidiaries among which the allocations are made. An inaccurate allocation may impact our consolidated financial results, particularly in the case of subsidiaries that we do not wholly own since our financial statements include adjustments to reflect the minority ownership interests in our subsidiaries held by others.
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If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion or expresses a qualified or adverse opinion about the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common shares could be negatively affected. In addition, we could become subject to investigations by the NYSE American, the Securities and Exchange Commission, and other regulatory authorities, which could require additional financial and management resources.
We received a loan under the Paycheck Protection Program of the CARES Act, and all or a portion of the loan may not be forgivable.*
In April 2020, we received a loan for $523,000 from Axos Bank under the PPP contained within the new CARES Act. The PPP loan has a term of two years, is unsecured, and is guaranteed by the U.S. Small Business Administration (SBA). The loan carries a fixed interest rate of one percent per annum, with the first six months of interest deferred. Under the CARES Act and Paycheck Protection Program Flexibility Act, we are eligible to apply for forgiveness of all loan proceeds used to pay payroll costs, rent, utilities and other qualifying expenses during the 24-week period following receipt of the loan, provided that we maintain our number of employees and compensation within certain parameters during such period. Not more than 40% of the forgiven amount may be for non-payroll costs. If the conditions outlined in the PPP loan program are adhered to by us, all or part of such loan could be forgiven. However, we cannot provide any assurance that any amount of the PPP loan will ultimately be forgiven by the SBA. Any forgiven amounts will not be included in our taxable income. We applied for full forgiveness of the PPP loan on September 30, 2020.
Risks Related to Government Regulation
We may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws, including anti-kickback and false claims laws, transparency laws, and health information privacy and security laws. If we are unable to comply, or have not fully complied, with such laws, it could face substantial penalties.
Our current and future operations may be subject to various federal and state fraud and abuse laws, including, without limitation, the federal Anti-Kickback Statute, the federal False Claims Act, and healthcare professional transparency laws and regulations. These laws may impact, among other things, our research activities and our proposed sales, marketing, and education programs. In addition, we may be subject to patient privacy regulation by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include:
| ● | the federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, to induce, or in return for, the purchase or recommendation of an item or service reimbursable under a federal healthcare program, such as the Medicare and Medicaid programs; | |
| ● | federal civil and criminal false claims laws, including the federal False Claims Act, and civil monetary penalty laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent; | |
| ● | the federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), which created new federal criminal statutes that prohibit, among other things, executing a scheme to defraud any healthcare benefit program and making false statements relating to healthcare matters; | |
| ● | HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, (“HITECH”) and their implementing regulations, which imposes certain requirements on covered entities,” including certain healthcare providers, health plans, and healthcare clearinghouses, as well as their respective “business associates” that create, receive, maintain or transmit individually identifiable health information for or on behalf of a covered entity, relating to the privacy, security, and transmission of individually identifiable health information; |
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| ● | The Physician Payments Sunshine Act which requires manufacturers of drugs, devices, biologics, and medical supplies to report annually to CMS information related to payments and other transfers of value to physicians, as defined by such law, and teaching hospitals, and ownership and investment interests held by physicians and other healthcare providers and their immediate family members and applicable group purchasing organizations; and | |
| ● | state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws that may apply to items or services reimbursed by any third-party payors, including commercial insurers, state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government, or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers, marketing expenditures, or drug pricing, state and local laws that require the registration of pharmaceutical sales representatives, and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts. |
Because of the breadth of these laws and the narrowness of the statutory exceptions and regulatory safe harbors available, it is possible that some of our business activities could be subject to challenge under one or more of such laws. In addition, recent health care reform legislation has strengthened these laws.
If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply, we may be subject to significant penalties, including administrative, civil and criminal penalties, damages, fines, disgorgement, exclusion from participation in government health care programs, such as Medicare and Medicaid, integrity oversight and reporting obligations, imprisonment, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations.
If we do not receive regulatory approvals, we will not be permitted to sell our therapeutic and medical device products.
The therapeutic and medical device products that we and our subsidiaries develop cannot be sold until the FDA and corresponding foreign regulatory authorities approve the products for medical use. The need to obtain regulatory approval to market a new product means that:
| ● | We will have to conduct expensive and time-consuming clinical trials of new products. The full cost of conducting and completing clinical trials necessary to obtain FDA and foreign regulatory approval of a new product cannot be presently determined but could exceed our current financial resources. | |
| ● | Clinical trials and the regulatory approval process for a pharmaceutical or cell-based product can take several years to complete. As a result, we will incur the expense and delay inherent in seeking FDA and foreign regulatory approval of new products, even if the results of clinical trials are favorable. | |
| ● | Data obtained from preclinical and clinical studies is susceptible to varying interpretations and regulatory changes that could delay, limit, or prevent regulatory agency approvals. | |
| ● | Because the therapeutic products we are developing with pluripotent stem cell technology involve the application of new technologies and approaches to medicine, the FDA or foreign regulatory agencies may subject those products to additional or more stringent review than drugs or biologics derived from other technologies. | |
| ● | A product that is approved may be subject to restrictions on use. | |
| ● | The FDA can recall or withdraw approval of a product, if it deems necessary. | |
| ● | We will face similar regulatory issues in foreign countries. |
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Government-imposed bans or restrictions and religious, moral, and ethical concerns about the use of hES cells could prevent us from developing and successfully marketing stem cell products.
Government-imposed bans or restrictions on the use of embryos or hES cells in research and development in the United States and abroad could generally constrain stem cell research, thereby limiting the market and demand for our products. During March 2009, President Obama lifted certain restrictions on federal funding of research involving the use of hES cells, and in accordance with President Obama’s Executive Order, the National Institutes of Health (“NIH”) has adopted guidelines for determining the eligibility of hES cell lines for use in federally funded research. The central focus of the guidelines is to assure that hES cells used in federally funded research were derived from human embryos that were created for reproductive purposes, were no longer needed for this purpose, and were voluntarily donated for research purposes with the informed written consent of the donors. The hES cells that were derived from embryos created for research purposes rather than reproductive purposes, and other hES cells that were not derived in compliance with the guidelines, are not eligible for use in federally funded research. California law requires that stem cell research be conducted under the oversight of a stem cell review oversight committee (“SCRO”). Many kinds of stem cell research, including the derivation of new hES cell lines, may only be conducted in California with the prior written approval of the SCRO. A SCRO could prohibit or impose restrictions on the research that we plan to do. The use of hES cells may give rise to religious, moral, and ethical issues. These considerations could lead to more restrictive government regulations or could generally constrain stem cell research, thereby limiting the market and demand for our products.
We expect that the commercial opportunity for some of our products may depend on our ability to obtain reimbursement and continued coverage from various payors, including government entities and insurance companies.
If these third-party payors do not consider our products to be cost-effective compared to other therapies, they may not cover our products as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our products on a profitable basis.
For example, in the United States, healthcare providers are reimbursed for covered services and products they deliver through Medicare, Medicaid and other government healthcare programs, as well as through private payers. No uniform policy for coverage and reimbursement exists in the United States, and coverage and reimbursement can differ significantly from payor to payor. Decisions regarding whether to cover any of our product candidates, if approved, the extent of coverage and amount of reimbursement to be provided are made on a plan-by-plan basis. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement rates, but also have their own methods and approval process apart from Medicare determinations. As a result, the coverage determination process is often a time-consuming and costly process that will require us to provide scientific and clinical support for the use of our product candidates to each payor separately, with no assurance that coverage and adequate reimbursement will be applied consistently or obtained in the first instance. We may be required to provide specified rebates or discounts on the products we sell to certain government funded programs, including Medicare and Medicaid, and those rebates or discounts have increased over time. The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, the “ACA”), enacted in 2010, increased many of the mandatory discounts and rebates and imposed a new branded prescription pharmaceutical manufacturers and importers fee payable each year by certain manufacturers.
We face similar issues outside of the United States. In some non-U.S. jurisdictions, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug pricing vary widely from country to country. For example, the EU provides options for its member states to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. A member state may approve a specific price for the medicinal product, or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our products. Historically, products launched in the EU do not follow price structures of the United States and generally tend to be significantly lower.
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Disruptions at the FDA and other government agencies caused by funding shortages or global health concerns could negatively impact our business.*
The ability of the FDA to review and approve proposed clinical trials or new product candidates can be affected by a variety of factors, including, but not limited to, government budget and funding levels, ability to hire and retain key personnel and accept the payment of user fees, statutory, regulatory, and policy changes, and other events that may otherwise affect the FDA’s ability to perform routine functions. Average review times at the agency have fluctuated in recent years as a result. In addition, government funding of other government agencies that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable.
Disruptions at the FDA and other agencies may also slow the time necessary for new product candidates to be reviewed and/or approved by necessary government agencies, which would adversely affect our business. For example, over the last several years, including for 35 days beginning on December 22, 2018, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough critical FDA employees and stop critical activities.
Separately, in response to the global COVID-19 pandemic, on March 10, 2020, the FDA announced its intention to postpone most foreign inspections of manufacturing facilities and products through April 2020, and subsequently, on March 18, 2020, the FDA announced its intention to temporarily postpone routine surveillance inspections of domestic manufacturing facilities. Regulatory authorities outside the United States may adopt similar restrictions or other policy measures in response to the COVID-19 pandemic. If a prolonged government shutdown occurs, or if global health concerns continue to prevent the FDA or other regulatory authorities from conducting their regular inspections, reviews, or other regulatory activities, it could significantly impact the ability of the FDA or other regulatory authorities to timely review and process our regulatory submissions, which could have a material adverse effect on our business.
The ACA and future changes to that law may adversely affect our business.
As a result of the adoption of the ACA, in the United States, substantial changes have been made to the system for paying for healthcare in the United States. Among the ACA’s provisions of importance to our industry are that it:
| ● | created the branded prescription pharmaceutical manufacturers and importers annual fee; | |
| ● | increased the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program, to 23.1% and 13% of the average manufacturer price for most branded and generic drugs, respectively and capped the total rebate amount for innovator drugs at 100% of the Average Manufacturer Price; | |
| ● | created new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for certain drugs and biologics that are inhaled, infused, instilled, implanted or injected; | |
| ● | extended manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations; |
| ● | expanded eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals and by adding new mandatory eligibility categories for individuals with income at or below 133% of the federal poverty level, thereby potentially increasing manufacturers’ Medicaid rebate liability; | |
| ● | expanded the entities eligible for discounts under the Public Health program; | |
| ● | created a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research; | |
| ● | established a Centers for Medicare & Medicaid Services (“CMS”) to test innovative payment and service delivery models to lower Medicare and Medicaid spending, potentially including prescription drug spending; and | |
| ● | created a licensure framework for follow on biologic products. |
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There remain judicial and Congressional challenges to certain aspects of the ACA, as well as recent efforts by the Trump administration to repeal or replace certain aspects of the ACA. Since January 2017, President Trump has signed Executive Orders and other directives designed to delay the implementation of certain provisions of the ACA. Concurrently, Congress has considered legislation that would repeal or repeal and replace all or part of the ACA. While Congress has not passed comprehensive repeal legislation, it has enacted laws that modify certain provisions of the ACA such as removing penalties, starting January 1, 2019, for not complying with the ACA’s individual mandate to carry health insurance, and eliminating the implementation of certain ACA-mandated fees. On December 14, 2018, a Texas U.S. District Court Judge ruled that the ACA is unconstitutional in its entirety because the “individual mandate” was repealed by Congress as part of the 2017 Tax Act. Additionally, on December 18, 2019, the U.S. Court of Appeals for the 5th Circuit upheld the District Court ruling that the individual mandate was unconstitutional and remanded the case back to the District Court to determine whether the remaining provisions of the ACA are invalid as well. On March 2, 2020, the United States Supreme Court granted the petitions for writs of certiorari to review this case, and has allotted one hour for oral arguments, which are expected to occur in the fall. It is unclear how such litigation and other efforts to repeal and replace the ACA will impact the ACA and our business.
In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. For example, the Budget Control Act of 2011, includes reductions to Medicare payments to providers of 2% per fiscal year, which went into effect on April 1, 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2030 unless additional Congressional action is taken. The CARES Act, which was signed into law in March 2020 and is designed to provide financial support and resources to individuals and businesses affected by the COVID-19 pandemic, suspended the 2% Medicare sequester from May 1, 2020 through December 31, 2020, and extended the sequester by one year, through 2030. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, reduced Medicare payments to several providers, including hospitals, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years.
Further, there has been heightened governmental scrutiny in the United States of pharmaceutical pricing practices in light of the rising cost of prescription drugs and biologics. Such scrutiny has resulted in several recent congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for products. At the federal level, the Trump administration’s budget proposal for fiscal year 2021 includes a $135 billion allowance to support legislative proposals seeking to reduce drug prices, increase competition, lower out-of-pocket drug costs for patients, and increase patient access to lower-cost generic and biosimilar drugs. On March 10, 2020, the Trump administration sent “principles” for drug pricing to Congress, calling for legislation that would, among other things, cap Medicare Part D beneficiary out-of-pocket pharmacy expenses, provide an option to cap Medicare Part D beneficiary monthly out-of-pocket expenses, and place limits on pharmaceutical price increases. In addition, the Trump administration previously released a “Blueprint” to lower drug prices and reduce out of pocket costs of drugs that contained proposals to increase drug manufacturer competition, increase the negotiating power of certain federal healthcare programs, incentivize manufacturers to lower the list price of their products, and reduce the out of pocket costs of drug products paid by consumers. HHS has solicited feedback on some of these measures and has implemented others under its existing authority. For example, in May 2019, CMS issued a final rule to allow Medicare Advantage plans the option to use step therapy for Part B drugs beginning January 1, 2020.This final rule codified CMS’s policy change that was effective January 1, 2019. While some of these and other measures may require additional authorization to become effective, Congress and the Trump administration have each indicated that it will continue to seek new legislative and/or administrative measures to control drug costs. At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing.
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In addition, it is possible that additional governmental action is taken to address the COVID-19 pandemic. For example, on April 18, 2020, CMS announced that qualified health plan issuers under the ACA may suspend activities related to the collection and reporting of quality data that would have otherwise been reported between May and June 2020 given the challenges healthcare providers are facing responding to the COVID-19 pandemic.
If we fail to comply with the extensive legal and regulatory requirements affecting the health care industry, we could face increased costs, penalties and a loss of business.
Our activities, and the activities of our collaborators, distributors and other third-party providers, are subject to extensive government regulation and oversight both in the U.S. and in foreign jurisdictions. The FDA and comparable agencies in other jurisdictions will directly regulate many of our most critical business activities, including the conduct of preclinical and clinical studies, product manufacturing, advertising and promotion, product distribution, adverse event reporting and product risk management. Our interactions in the U.S. or abroad with physicians and other health care providers that may prescribe or purchase our products are also subject to government regulation designed to prevent fraud and abuse in the sale and use of the products and place greater restrictions on the marketing practices of health care companies. Health care companies are facing heightened scrutiny of their relationships with health care providers from anti-corruption enforcement officials. In addition, health care companies have been the target of lawsuits and investigations alleging violations of government regulation, including claims asserting submission of incorrect pricing information, impermissible off-label promotion of pharmaceutical products, payments intended to influence the referral of health care business, submission of false claims for government reimbursement, antitrust violations or violations related to environmental matters. Risks relating to compliance with laws and regulations may be heightened as we bring products to the market globally.
Regulations governing the health care industry are subject to change, with possibly retroactive effect, including:
| ● | new laws, regulations or judicial decisions, or new interpretations of existing laws, regulations or decisions, related to health care availability, pricing or marketing practices, compliance with wage and hour laws and other employment practices, method of delivery, payment for health care products and services, compliance with health information and data privacy and security laws and regulations, tracking and reporting payments and other transfers of value made to physicians and teaching hospitals, extensive anti-bribery and anti-corruption prohibitions, product serialization and labeling requirements and used product take-back requirements; | |
| ● | changes in the FDA and foreign regulatory approval processes that may delay or prevent the approval of new products and result in lost market opportunity; | |
| ● | requirements that provide for increased transparency of clinical trial results and quality data, such as the EMA’s clinical transparency policy, which could impact our ability to protect trade secrets and competitively sensitive information contained in approval applications or could be misinterpreted leading to reputational damage, misperception or legal action which could harm our business; and | |
| ● | changes in FDA and foreign regulations that may require additional safety monitoring, labeling changes, restrictions on product distribution or use, or other measures after the introduction of our products to market, which could increase our costs of doing business, adversely affect the future permitted uses of approved products, or otherwise adversely affect the market for our products. |
Violations of governmental regulation may be punishable by criminal and civil sanctions against us, including fines and civil monetary penalties and exclusion from participation in government programs, including Medicare and Medicaid, as well as against executives overseeing our business. In addition to penalties for violation of laws and regulations, we could be required to repay amounts we received from government payors or pay additional rebates and interest if we are found to have miscalculated the pricing information we have submitted to the government. We cannot ensure that our compliance controls, policies and procedures will in every instance protect us from acts committed by our employees, collaborators, partners or third-party providers that would violate the laws or regulations of the jurisdictions in which we operate. Whether or not we have complied with the law, an investigation into alleged unlawful conduct could increase our expenses, damage our reputation, divert management time and attention and adversely affect our business.
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Even if we receive approval for our products, we may be subject to extensive regulatory obligations in order to commercialize our products.
Even after initial FDA or foreign regulatory agency approval has been obtained, further studies may be required to provide additional data on safety or to gain approval for the use of a product as a treatment for clinical indications other than those initially targeted. Use of a product during testing and after marketing could reveal side effects that could delay, impede, or prevent marketing approval, result in a regulatory agency-ordered product recall, or in regulatory agency-imposed limitations on permissible uses or in withdrawal of approval. For example, if the FDA or foreign regulatory agency becomes aware of new safety information after approval of a product, it may require us to conduct further clinical trials to assess a known or potential serious risk and to assure that the benefit of the product outweigh the risks. If we are required to conduct such a post-approval study, periodic status reports must be submitted to the FDA or foreign regulatory agency. Failure to conduct such post-approval studies in a timely manner may result in substantial civil or criminal penalties. Data resulting from these clinical trials may result in expansions or restrictions to the labeled indications for which a product has already been approved. Any of these requirements or actions may negatively impact our business or operations.
If we are deemed to be an investment company, we may have to institute burdensome compliance requirements and our activities may be restricted.
An entity that, among other things, is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, owning, trading or holding certain types of securities would be deemed an investment company under the Investment Company Act of 1940, as amended (the “1940 Act”). Based on the securities we hold, including our equity ownership in publicly traded companies, we may not meet the requirements for an exemption promulgated under the 1940 Act. If we are deemed to be an investment company under the 1940 Act, we would be subject to additional limitations on operating our business, including limitations on the issuance of securities, which may make it difficult for us to raise capital.
Risks Related to Our Clinical Development and Commercial Operations
Clinical studies are costly, time consuming and are subject to risks that could delay or prevent commercialization of our current or future product candidates.
We cannot guarantee that any clinical studies will be conducted as planned or completed on schedule, if at all. A failure of one or more clinical studies can occur at any stage of development. Events that may prevent successful or timely completion of clinical development include but are not limited to:
| ● | inability to generate satisfactory preclinical, toxicology, or other in vivo or in vitro data or diagnostics to support the initiation or continuation of clinical studies necessary for product approval; | |
| ● | delays in securing clinical investigators and agreeing on acceptable terms with contract research organizations (“CROs”) and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among CROs and clinical trial sites; | |
| ● | delays in obtaining required Institutional Review Board (“IRB”) approval at each clinical trial site; | |
| ● | failure to obtain permission from regulatory authorities to conduct a clinical trial after review of an investigational new drug (“IND”) or equivalent foreign application or amendment; | |
| ● | slower than anticipated rates of patient recruitment and enrollment (including as a result of actual or threatened public health emergencies and outbreaks of disease such as the current COVID-19 pandemic), failing to reach the targeted number of patients due to competition for patients from other trials, or patients dropping out of our clinical studies once enrolled; | |
| ● | failure by clinical sites or our CROs or other third parties to adhere to clinical trial requirements or report complete findings; |
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| ● | failure to perform the clinical studies in accordance with the FDA’s good clinical practices requirements or applicable foreign regulatory guidelines; | |
| ● | occurrence of adverse events associated with our product candidates or with product candidates of third parties that may have characteristics similar to or perceived to be similar to our product candidates; | |
| ● | negative or inconclusive results from our clinical trials which may result in our deciding, or regulators requiring us, to conduct additional clinical studies or to curtail or abandon development programs for a product candidate; | |
| ● | unforeseen side effects, possibly resulting in the FDA or other regulatory authorities denying approval of our product candidates; | |
| ● | approval and introduction of new therapies or changes in standards of practice or regulatory guidance that render our clinical trial endpoints or the targeting of our proposed indications obsolete; | |
| ● | inability to monitor patients adequately during or after treatment or problems with investigator or patient compliance with the trial protocols; | |
| ● | inability or unwillingness of medical investigators to follow our clinical protocols; | |
| ● | unavailability of clinical trial supplies; | |
| ● | inability to use clinical trial results from foreign jurisdictions to support U.S. regulatory approval; | |
| ● | changes in regulatory requirements and guidance that require amending or submitting new clinical protocols; | |
| ● | the cost of clinical studies of our product candidates; and | |
| ● | delays in agreeing on acceptable terms with third-party manufacturers and the time for manufacture of sufficient quantities of our product candidates for use in clinical studies. |
Any inability to successfully complete clinical development and obtain regulatory approval could result in additional costs to us or impair our ability to generate revenue. Clinical trial delays could also shorten any periods during which our products have patent protection and may allow competitors to develop and bring products to market before we do and may harm our business and results of operations.
Clinical and preclinical drug development involves a lengthy and expensive process with an uncertain outcome. The results of early preclinical trials and clinical trials of our product candidates are not necessarily predictive of future results. Our product candidates may not have favorable results in later clinical trials, if any, or receive regulatory approval on a timely basis, if at all.*
Clinical and preclinical drug development is expensive and can take many years to complete, and its outcome is inherently uncertain. Our clinical trials may not be conducted as planned or completed on schedule, if at all, and failure can occur at any time during the preclinical trial or clinical trial process. All of our product candidates will require substantial additional development, and no assurances can be given that the development of any of our product candidates will ultimately be successful. Although we may from time to time disclose results from preclinical testing or preliminary data or interim results from our clinical studies of our product candidates, and earlier clinical studies, including clinical studies with similar product candidates, these are not necessarily predictive of future results, including clinical trial results. The historical failure rate for product candidates in our industry is high.
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The results of our current and future clinical trials may differ from results achieved in earlier preclinical and clinical studies for a variety of reasons, including:
| ● | we may not demonstrate the potency and efficacy benefits observed in previous studies; | |
| ● | our efforts to improve, standardize and automate the manufacture of our product candidates, including OpRegen, OPC1 and VAC2, and any resulting deviations in the manufacture of our product candidates, may adversely affect the safety, purity, potency or efficacy of such product candidates; | |
| ● | differences in trial design, including differences in size, eligibility criteria, and patient populations; | |
| ● | advancements in the standard of care may affect our ability to demonstrate efficacy or achieve trial endpoints in our current or future clinical trials; | |
| ● | safety issues or adverse events in patients that enroll in our current or future clinical trials; and | |
| ● | results in preclinical and clinical tests may not be repeated in subsequent tests or be predictive of future results. |
In particular, data presented from the Phase 1/2a open-label trial showed that both the surgical procedure and the OpRegen cells were generally well tolerated, with no treatment-related systemic serious adverse events reported to date in the first nine patients. The best corrected visual acuity of these patients remained relatively stable. In addition, the imaging of patients 8 and 9 suggested early signs of structural improvement within the retina. However, we do not know how OpRegen will perform in future clinical trials.
It is not uncommon to observe results in clinical trials that are unexpected based on preclinical trials and early clinical trials, and many product candidates fail in clinical trials despite very promising early results. Moreover, preclinical and clinical data may be susceptible to varying interpretations and analyses. A number of companies in the biotechnology industry have suffered significant setbacks in clinical development even after achieving promising results in earlier studies.
Further, as a result of the COVID-19 pandemic, if patients drop out of our clinical trials, miss scheduled doses or follow-up visits or otherwise fail to follow clinical trial protocols, or if our clinical trials are otherwise disrupted due to COVID-19 or actions taken to slow its spread, the integrity of data from our clinical trials may be compromised or not accepted by the FDA or other regulatory authorities, which would represent a significant setback for the applicable program.
Even if our current and planned clinical trials are successful, we will need to conduct additional clinical trials, which may include registrational trials, trials in additional patient populations or under different treatment conditions, and trials using different manufacturing protocols, processes, materials or facilities or under different manufacturing conditions, before we are able to seek approvals for our product candidates from the FDA and regulatory authorities outside the United States to market and sell these product candidates. Our failure to meet the requirements to support marketing approval for our product candidates in our ongoing and future clinical trials would substantially harm our business and prospects. For the foregoing reasons, our ongoing and planned clinical trials may not be successful, which could have a material adverse effect on our business, financial condition and results of operations.
Interim, topline and preliminary data from our clinical trials that we announce or publish from time to time may change as more patient data become available and are subject to audit and verification procedures that could result in material changes in the final data.
From time to time, we may publicly disclose preliminary or topline data from our clinical trials, which is based on a preliminary analysis of then-available data, and the results and related findings and conclusions are subject to change following a more comprehensive review of the data related to the particular trial. We also make assumptions, estimations, calculations and conclusions as part of our analyses of data, and we may not have received or had the opportunity to fully and carefully evaluate all data. As a result, the topline results that we report may differ from future results of the same studies, or different conclusions or considerations may qualify such results, once additional data have been received and fully evaluated. Topline data also remain subject to audit and verification procedures that may result in the final data being materially different from the preliminary data we previously published. As a result, topline data should be viewed with caution until the final data are available. From time to time, we may also disclose interim data from our clinical trials. Interim data from clinical trials that we may complete are subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues and more patient data become available. Adverse differences between preliminary or interim data and final data could significantly harm our business prospects.
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Further, others, including regulatory agencies, may not accept or agree with our assumptions, estimates, calculations, conclusions or analyses or may interpret or weigh the importance of data differently, which could impact the value of the particular program, the approvability or commercialization of the particular product candidate or product and our company in general. In addition, the information we choose to publicly disclose regarding a particular trial is based on what is typically extensive information, and you or others may not agree with what we determine is the material or otherwise appropriate information to include in our disclosure, and any information we determine not to disclose may ultimately be deemed significant with respect to future decisions, conclusions, views, activities or otherwise regarding a particular product candidate or our business. If the topline data that we report differ from actual results, or if others, including regulatory authorities, disagree with the conclusions reached, our ability to obtain approval for, and commercialize, our product candidates may be harmed, which could harm our business, operating results, prospects or financial condition.
Because we have multiple cell therapy programs in clinical development, we may expend our limited resources to pursue a particular product candidate and fail to capitalize on product candidates that may be more profitable or for which there is a greater likelihood of success.
We have three cell therapy programs in clinical development. OpRegen is currently in a Phase 1/2a multicenter clinical trial for the treatment of dry AMD, OPC-1 is currently in a Phase 1/2a clinical trial for acute spinal cord injuries, and VAC2 is in a Phase 1 clinical trial in non-small cell lung cancer. As a result of these and other future clinical trials for these product candidates or any of our future product candidates may make our decision as to which product candidates to focus on more difficult and we may forgo or delay pursuit of opportunities with other product candidates that could have had greater commercial potential or likelihood of success.
Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and development programs and product candidates may not yield any commercially viable products. If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through future collaborations, licenses and other similar arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such product candidate.
Additionally, we may pursue additional in-licenses or acquisitions of development-stage assets or programs, which entails additional risk to us. Identifying, selecting and acquiring promising product candidates requires substantial technical, financial and human resources expertise. Efforts to do so may not result in the actual acquisition or license of a particular product candidate, potentially resulting in a diversion of our management’s time and the expenditure of our resources with no resulting benefit. For example, if we are unable to identify programs that ultimately result in approved products, we may spend material amounts of our capital and other resources evaluating, acquiring and developing products that ultimately do not provide a return on our investment.
The commercial success of any of our current or future product candidates will depend upon the degree of market acceptance by physicians, patients, third-party payors, other health care providers and others in the medical community.
Even if a product candidate obtains regulatory approval, its commercial success will depend in part on physicians, patients, third-party payors, other health care providers and others in the medical community accepting our product candidates as medically useful, cost-effective, and safe. Any product we bring to the market may not gain market acceptance by such parties. The degree of market acceptance of any of our products will depend on several factors, including without limitation:
| ● | the efficacy of the product as demonstrated in clinical trials and potential advantages over competing treatments; | |
| ● | the prevalence and severity of the disease and any side effects; | |
| ● | the clinical indications for which approval is granted, including any limitations or warnings contained in a product’s approved labeling; |
| ● | the convenience and ease of administration; | |
| ● | the cost of treatment, particularly as additive to existing treatments; | |
| ● | the willingness of the patients and physicians to accept and use these therapies; | |
| ● | the marketing, sales and distribution support for the products; | |
| ● | the publicity concerning our products or competing products and treatments; and | |
| ● | the pricing and availability of coverage and adequate reimbursement by third-party payors and government authorities. |
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Even if a product displays a favorable efficacy and safety profile upon approval, market acceptance of the product will be uncertain. Efforts to educate the medical community and third-party payors on the benefits of the products may require significant investment and resources and may never succeed. If our products fail to achieve an adequate level of acceptance by physicians, patients, third-party payors, other health care providers and others in the medical community, we will not be able to generate sufficient revenue to become or remain profitable.
If the market opportunities for our product candidates are smaller than we believe and estimate they are, we may not meet our revenue expectations and our business may suffer.
Our projections of the number of potential users in the markets we are attempting to address are based on our beliefs and estimates. Our estimates have been derived from a variety of sources, including market research and publications and scientific literature estimating the total number of potential patients and currently approved or used therapies. Our estimates are also based on assumptions regarding the potential size of the market assuming broad regulatory approval or potential usage by physicians beyond the approved label. Any of our estimates may prove to be incorrect. The scope of approval and potential use of any product candidate may be significantly narrower, and the number of patients may turn out to be lower than expected. Competitive products or approaches may be approved or come into use and the potentially addressable patient population for each of our product candidates may be limited or may not be amenable to treatment with our product candidates, and new patients may become increasingly difficult to identify or gain access to, any which could adversely affect our results of operations and our business.
Sales of the products we may develop will be adversely affected by the availability of competing products.
Our products and product candidates will face substantial competition, whether through the development of safer and more effective alternatives to our products, lower costs to administer than our products or other forms of competition such as more favorable distribution, reimbursement and pricing or formulary and health care provider acceptance.
The cell therapy industry is characterized by rapidly evolving technology and intense competition. Our competitors include major multinational pharmaceutical companies, specialty biotechnology companies, and chemical and medical products companies operating in the fields of regenerative medicine, cell therapy, tissue engineering, and tissue regeneration. Many of these companies are well established and possess technical, research and development, financial, and sales and marketing resources significantly greater than ours. In addition, certain smaller biotechnology companies have formed strategic collaborations, partnerships, and other types of joint ventures with larger, well-established industry competitors that afford the smaller companies’ potential research and development as well as commercialization advantages. Academic institutions, governmental agencies, and other public and private research organizations are also conducting and financing research activities, which may produce products directly competitive to those we are developing.
We believe that some of our competitors are trying to develop pluripotent cells and human embryonic progenitor cell (“hEPC”) based technologies and products that may compete with our stem cell products based on efficacy, safety, cost, and intellectual property positions. Ocata, which was acquired by a subsidiary of Astellas Pharma Inc., and Retinal Patch Technologies Inc. are conducting clinical trials of hES cell products designed to treat age-related macular degeneration. If their products are proven to be safe and effective, they may reach the market ahead of OpRegen.
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We may also face competition from companies that have filed patent applications relating to the propagation and differentiation of stem cells. Those companies include Ocata, which in 2015 had certain U.S. patents issue with claims directed to methods of producing RPE cells and isolating and purifying such cells. We may be required to seek licenses from these competitors in order to commercialize certain products proposed by us, and such licenses may not be granted.
Competitive products may make any products we develop obsolete or noncompetitive before we recover the expense of developing and commercializing our product candidates. If we are unable to compete effectively, our opportunity to generate revenue from the sale of our products we may develop, if approved, could be adversely affected.
We will face risks related to our own manufacturing capabilities and those related to our reliance on third parties to manufacture products, including those related to product acquisition costs, production delays, and supply shortages that could impair our ability to complete the development and commercialization of our product candidates.
The manufacture of medical products is complex and requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. We do not currently have nor do we plan to acquire the infrastructure or capability to internally manufacture Renevia or our other HyStem products on a clinical or commercial scale. Although we have manufacturing capability through Cell Cure for OpRegen in Israel, we will need greater manufacturing capacity if we are to successfully commercialize our products. Unless we can raise the capital required to construct our own commercial scale manufacturing facilities and can develop the expertise to manage and operate a manufacturing facility of our own, we may need to rely on third-party manufacturers to manufacture any products we develop. There is no assurance that we will be able to identify manufacturers on acceptable terms or at all. Regardless of whether we do our own manufacturing or rely on third parties to manufacture products for us, we will face risks related to the manufacture of our products including these risks:
| ● | We or any third-party manufacturers might not timely formulate and manufacture our products or produce the quantity and quality required to meet our clinical and commercial needs, if any. | |
| ● | We or any third-party manufacturers may not execute our manufacturing procedures appropriately. | |
| ● | Any third-party manufacturers we engage may not perform as agreed or may not remain in the contract manufacturing business for the time required to supply our clinical trials or to successfully produce, store and distribute our products on a commercial scale. | |
| ● | We or any third-party manufacturers will be subject to ongoing periodic unannounced inspection by the FDA and corresponding state agencies to ensure strict compliance with current good manufacturing practices (“cGMP”), and other government regulations and corresponding foreign standards. We will not have control over third-party manufacturers’ compliance with applicable regulations and standards. | |
| ● | We may not own, or may have to share, the intellectual property rights to any improvements made by our third-party manufacturers in the manufacturing process for our product candidates. | |
| ● | We may not obtain licenses for third-party intellectual property rights needed by manufacturers to produce our products. | |
| ● | Third-party manufacturers could breach or terminate their agreements with us. | |
| ● | We or third-party manufacturers may experience manufacturing difficulties as a result of resource constraints, labor disputes, unstable political environments, natural disasters, public health crises such as pandemics and epidemics, political crises such as terrorism, war, political insecurity or other conflict, or other events outside of our or our third-party manufacturers control (including as a result of actual or threatened public health emergencies and outbreaks of disease such as the current COVID-19 pandemic). This may result in business closures that affect us and our third-party manufacturers. |
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In addition, we may rely on third parties to perform release testing on our product candidates prior to delivery to patients. If these tests are not appropriately conducted and test data are not reliable, patients could be put at risk of serious harm which could result in product liability suits.
If we or any third-party manufacturers we may engage were to encounter any of these difficulties, our ability to provide our product candidates to patients in clinical trials or to the medical market place would be jeopardized. Any delay or interruption in the supply of clinical trial supplies could delay the completion of clinical trials, increase the costs associated with maintaining clinical trial programs and, depending upon the period of delay, could require us to either commence new clinical trials at additional expense or terminate clinical trials completely. Each risk could delay our clinical trials, any approval of our product candidates by the FDA, or the commercialization of our product candidates, and could result in higher costs or deprive us of potential product revenue.
Any cell-based products that receive regulatory approval may be difficult and expensive to manufacture profitably.
Cell-based products are among the more expensive biologic products to manufacture in accordance with cGMP. We do not yet have sufficient information to reliably estimate the cost of commercially manufacturing any of our product candidates. Excessive manufacturing costs could make our product candidates too expensive to compete in the medical market place with alternative products manufactured by our competitors or might result in third party payors such as health insurers and Medicare, declining to cover our products or setting reimbursement levels too low for us to earn a profit from the commercialization of one or more of our products.
We may not secure a commercialization partner for Renevia.
In September 2019, Renevia was granted a CE Mark and Class III classification with an intended use in adults as a resorbable matrix for the delivery of autologous adipose tissue preparations to restore and/or augment facial volume after subcutaneous fat volume loss for the treatment of facial lipoatrophy. The CE Mark provides us, or our authorized agent, the authority to market and distribute Renevia throughout the European Union (“EU”) and in other countries that recognize the CE Mark.
However, because we have no commercial infrastructure, we are seeking a commercialization partner in the EU. We can give no assurance that we will secure a commercialization partner for Renevia or otherwise commercialize Renevia.
The ongoing COVID-19 pandemic may adversely affect our operations, including the conduct of our clinical trials.*
In December 2019, a novel strain of coronavirus and the resulting illness known as COVID-19 emerged in Wuhan, China. The outbreak has now spread to other countries and has been declared a pandemic by the World Health Organization.
The COVID-19 pandemic has resulted in travel and other restrictions in order to reduce the spread of the disease, including a California executive order and several other state and local orders across the country, which, among other things, direct individuals to shelter at their places of residence, direct businesses and governmental agencies to cease non-essential operations at physical locations, prohibit certain non-essential gatherings, and order cessation of non-essential travel. In response to these public health directives and orders, we have implemented work-from-home policies for our employees. The effects of the executive order, the shelter-in-place order and our work-from-home policies may negatively impact productivity, disrupt our business and delay our clinical programs and timelines, the magnitude of which will depend, in part, on the length and severity of the restrictions and other limitations on our ability to conduct our business in the ordinary course. These and similar, and perhaps more severe, disruptions in our operations could negatively impact our business, operating results and financial condition.
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As COVID-19 continues to spread in the United States and Israel, we have experienced and may continue to experience disruptions that could adversely affect our operations and clinical trials, including:
| ● | delays or difficulties in enrolling, or conducting follow-up visits with, patients in our clinical trials, particularly patients for our OpRegen Phase 1/2a clinical trial, who are older and who may be at higher risk of complications from COVID-19; | |
| ● | delays or difficulties in clinical site initiation, including difficulties in recruiting clinical site investigators and staff; | |
| ● | diversion of healthcare resources away from the conduct of clinical trials; | |
| ● | interruption of key clinical trial activities, such as clinical trial site monitoring, due to limitations on travel; | |
| ● | limited availability of our employees and the staff of our current clinical sites due to sickness or social distancing measures; | |
| ● | manufacturing difficulties for us and our suppliers of raw materials caused by business closures; | |
| ● | delays in clinical sites receiving the supplies and materials needed to conduct our clinical trials, including interruption in global shipping that may affect the transport of clinical trial materials; | |
| ● | changes in local regulations as part of a response to the COVID-19 outbreak which may require us to change the ways in which our clinical trials are conducted, which may result in unexpected costs, or to discontinue the clinical trials altogether; | |
| ● | interruption or delays in the operations of the FDA or other regulatory authorities, which may impact review and approval timelines; | |
| ● | risk that participants enrolled in our clinical trials will acquire COVID-19 while the clinical trial is ongoing, which could impact the results of the clinical trial, including by increasing the number of observed adverse events; and; | |
| ● | refusal of the FDA to accept data from clinical trials in affected geographies;
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These and other disruptions in our operations and the global economy could negatively impact our business, operating results and financial condition. The extent to which the COVID-19 pandemic affects our operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration and severity of the pandemic, and the actions that may be required to contain the COVID-19 pandemic or treat its impact.
Our clinical trials have been, and may in the future be, affected by the COVID-19 pandemic. For example, the COVID-19 pandemic has impacted patient enrollment in our OpRegen Phase 1/2a multicenter clinical trial and the VAC2 Phase 1 multicenter clinical trial. In particular, some sites have paused enrollment to focus on, and direct resources to, the COVID-19 pandemic, while at other sites, patients are choosing not to enroll or continue participating in the clinical trial as a result of the pandemic. We are unable to predict with confidence the duration of such patient enrollment delays and difficulties. If patient enrollment is delayed for an extended period of time, such clinical trials could be delayed or otherwise adversely affected. Our inability to enroll a sufficient number of patients for any of our current or future clinical trials could result in significant delays or may require us to abandon one or more clinical trials altogether. As a result, we may experience new or additional delays and difficulties in enrollment, which would result in the delay of completion of such trials beyond our expected timelines.
Our ongoing or planned clinical trials may also be impacted by interruptions or delays in the operations of the FDA and comparable foreign regulatory agencies.
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In addition, quarantines, shelter-in-place and similar government orders, or the perception that such orders, shutdowns or other restrictions on the conduct of business operations could occur, related to COVID-19 or other infectious diseases could impact personnel at our CROs or third-party manufacturing facilities upon which we rely, or the availability or cost of materials, which could disrupt the supply chain for our product candidates. To the extent our suppliers and service providers are unable to comply with their obligations under our agreements with them or they are otherwise unable to deliver or are delayed in delivering goods and services to us due to the COVID-19 pandemic, our ability to continue meeting clinical supply demand for our product candidates or otherwise advancing development of our product candidates may become impaired.
The spread of COVID-19 and actions taken to reduce its spread may also materially affect us economically. While the potential economic impact brought by, and the duration of, the COVID-19 pandemic may be difficult to assess or predict, there could be a significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity and financial position. In addition, the trading prices for other biotechnology companies have been highly volatile as a result of the COVID-19 pandemic. As a result, we may face difficulties raising capital through sales of our common shares or such sales may be on unfavorable terms.
COVID-19 and actions taken to reduce its spread continue to rapidly evolve. The extent to which COVID-19 may impede the development of our product candidates, reduce the productivity of our employees, disrupt our supply chains, delay our clinical trials, reduce our access to capital or limit our business development activities, will depend on future developments, which are highly uncertain and cannot be predicted with confidence.
In addition, to the extent the ongoing COVID-19 pandemic adversely affects our business and results of operations, it may also have the effect of heightening many of the other risks and uncertainties described in this ‘‘Risk Factors’’ section.
The withdrawal of the United Kingdom (the “U.K.”) from the EU, commonly referred to as “Brexit,” may adversely impact our ability to obtain regulatory approvals of our product candidates in the EU, result in restrictions or imposition of taxes and duties for importing our product candidates into the EU, and may require us to incur additional expenses in order to develop, manufacture and commercialize our product candidates in the EU.*
On June 23, 2016, the U.K. held a referendum in which a majority of the eligible members of the electorate voted for the U.K. to leave the EU. The U.K. formally left the EU on January 31, 2020, which is commonly referred to as Brexit. The U.K. is subject to a transition period until December 31, 2020 (the “Transition Period”), during which EU rules continue to apply. During the Transition Period, negotiations between the U.K. and the EU are expected to continue in relation to the customs and trading relationship between the U.K. and the EU following the expiry of the Transition Period. Due to the COVID-19 global pandemic, negotiations between the U.K. and the EU that were scheduled for March and April were either being postponed or occurring in a reduced forum via video conference. There is, therefore, an increased likelihood that the Transition Period may need to be extended beyond December 31, 2020 (although it remains the position of the UK government that it will not be extended). Under the formal withdrawal arrangements between the United Kingdom and the European Union, the parties had until June 30, 2020 to agree to extend the Transition Period if required. No such extension was agreed prior to such date. No agreement has yet been reached between the United Kingdom and the European Union and it may be the case that no formal customs and trading agreement will be reached prior to the expiry of the Transition Period on December 31, 2020.
Since a significant proportion of the regulatory framework in the U.K. applicable to our business and our product candidates is derived from EU directives and regulations, Brexit, following the Transition Period, could materially impact the regulatory regime with respect to the development, manufacture, importation, approval and commercialization of our product candidates in the U.K. or the EU. For example, as a result of the uncertainty surrounding Brexit, the European Medicines Agency (the “EMA”) relocated to Amsterdam from London. Following the Transition Period, the U.K. will no longer be covered by the centralized procedures for obtaining EU-wide marketing authorization from the EMA and, unless a specific agreement is entered into, a separate process for authorization of drug products, including our product candidates, will be required in the U.K., the potential process for which is currently unclear. Any delay in obtaining, or an inability to obtain, any marketing approvals, as a result of Brexit or otherwise, would prevent us from commercializing our product candidates in the U.K. or the EU and restrict our ability to generate revenue and achieve and sustain profitability. In addition, we may be required to pay taxes or duties or be subjected to other hurdles in connection with the importation of our product candidates into the EU, or we may incur expenses in establishing a manufacturing facility in the EU in order to circumvent such hurdles. If any of these outcomes occur, we may be forced to restrict or delay efforts to seek regulatory approval in the U.K. or the EU for our product candidates, or incur significant additional expenses to operate our business, which could significantly and materially harm or delay our ability to generate revenues or achieve profitability of our business. Any further changes in international trade, tariff and import/export regulations as a result of Brexit or otherwise may impose unexpected duty costs or other non-tariff barriers on us. These developments, or the perception that any of them could occur, may significantly reduce global trade and, in particular, trade between the affected nations and the U.K. It is also possible that Brexit may negatively affect our ability to attract and retain employees, particularly those from the EU.
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We face potential product liability, and, if successful claims are brought against us, we may incur substantial liability and costs. If the use or misuse of our products or product candidates harm patients or is perceived to harm patients even when such harm is unrelated to our products or product candidates, our regulatory approvals could be revoked, suspended or otherwise negatively affected, and we could be subject to costly and damaging product liability claims.
We face the risk of incurring liabilities to clinical trial patients if they are injured as a result of their participation in our clinical trials. In the event we commercialize Renevia in the EU or in other countries that recognize the CE Mark, we will also face product liability risks associated with the use of Renevia by consumers. If any claims are made and if liability can be established, the amount of any liability we or our affiliates may incur, could exceed any insurance coverage in effect, and the amount of the liability could be material to our financial condition.
The use or misuse of our product candidates in clinical trials and the sale of any products for which we obtain marketing approval, including Renevia, exposes us to the risk of product liability claims. Product liability claims might be brought against us by consumers, healthcare providers, pharmaceutical companies or others selling or otherwise coming into contact with our products. There is a risk that our product candidates may induce adverse events. If we cannot successfully defend against product liability claims, we could incur substantial liability and costs. In addition, regardless of merit or eventual outcome, product liability claims may result in:
| ● | impairment of our business reputation; |
| ● | initiation of investigations by regulators; | |
| ● | withdrawal of clinical trial participants; | |
| ● | costs due to related litigation; | |
| ● | distraction of management’s attention from our primary business; | |
| ● | substantial monetary awards to patients or other claimants; | |
| ● | the inability to commercialize our product candidates; | |
| ● | product recalls, withdrawals or labeling, marketing or promotional restrictions; and | |
| ● | decreased demand for our product candidates, if approved for commercial sale. |
We believe our current product liability insurance coverage is appropriate in light of our clinical programs; however, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. If and when we obtain marketing approval for product candidates, we intend to increase our insurance coverage to include the sale of commercial products; however, we may be unable to obtain product liability insurance on commercially reasonable terms or in adequate amounts. Significant damages have been awarded in class action lawsuits based on drugs or medical treatments that had unanticipated adverse effects. A successful product liability claim or series of claims brought against us could cause our stock price to decline and, if the amount of damages exceeds our insurance coverage, could adversely affect our results of operations and business.
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Cell Cure has received Israeli government grants for certain of its research and development activities. The terms of these grants may require Cell Cure to seek approvals and to satisfy specified conditions to manufacture products and transfer or license grant-supported technologies outside of Israel. In the context of such approvals, Cell Cure will be required to pay penalties in addition to the repayment of the grants. Such grants are applied for on a yearly basis and may not be available or only partially granted in the future, which would increase our costs.
Cell Cure has received Israeli government grants for certain of its research and development activities. The terms of these grants require prior approval and the satisfaction of specified conditions to manufacture products and transfer or license technologies outside of Israel.
Under the Encouragement of Research, Development and Technological Innovation in the Industry Law 5744-1984 (formerly known as the Law for the Encouragement of Research and Development in Industry 5744-1984), and the regulations, guidelines, rules, procedures and benefit tracks thereunder (collectively, the “Innovation Law”), annual research and development programs that meet specified criteria and are approved by a committee of the Israel Innovation Authority (“IIA”) are eligible for grants. The grants awarded are typically up to 50% of the project’s expenditures, as determined by the IIA committee and subject to the benefit track under which the grant was awarded. A company that receives a grant from the IIA ( a “Grant Recipient”), is typically required to pay royalties to the IIA on income generated from products incorporating know-how developed using such grants (including income derived from services associated with such products) or on all revenues of the Grant Recipient (depending upon the terms of the approval letters issued by the IIA), until 100% of the U.S. dollar-linked grant plus annual LIBOR interest is repaid. In general, the rate of such royalties varies between 3% to 5%.
The obligation to pay royalties is contingent on actual revenues being generated from such products and services or actual revenues being generated by the Grant Recipient in general (as the case may be). In the absence of such revenues, no payment of royalties is required. It should be noted that the restrictions under the Innovation Law will continue to apply even after the repayment of such royalties in full by the Grant Recipient including restrictions on the sale, transfer or licensing to a foreign entity of know-how developed as part of the programs under which the grants were given.
The terms of the grants under the Innovation Law also (generally) require that the products developed as part of the programs under which the grants were given be manufactured in Israel and that the know-how developed thereunder may not be transferred outside of Israel, unless prior written approval is received from the IIA (such approval is not required for the transfer of a portion of the manufacturing capacity which does not exceed, in the aggregate, 10% of the portion declared to be manufactured outside of Israel in the applications for funding (in which case only notification is required), and additional payments are required to be made to IIA). It should be noted that this does not restrict the export of products that incorporate the funded know-how.
The Innovation Law restricts the ability to transfer or license know-how funded by IIA outside of Israel. Transfer of IIA-funded know-how outside of Israel requires prior approval and is subject to approval and payment of a redemption fee to the IIA calculated according to the relevant formulas provided under the Innovation Law. A transfer or license for the purpose of the Innovation Law are generally interpreted very broadly and include, inter alia, any actual sale or assignment of the IIA-funded know-how, any license to further develop or otherwise exploit the IIA-funded know-how or the products resulting from such IIA-funded know-how or any other transaction, which, in essence, constitutes a transfer of the IIA-funded know-how. Generally, a mere license solely to market or distribute products resulting from the IIA-funded know-how would not be deemed a transfer or license for the purpose of the Innovation Law.
Part of Cell Cure’s research and development efforts have been financed, partially, through grants that it has received from the IIA and when we acquired our holdings in Cell Cure, we undertook in writing, vis-à-vis the IIA, to abide by, and to ensure the abidance of Cell Cure to, the Innovation Law. We therefore must comply with the requirements of the Innovation Law and related regulations. As of December 31, 2019, we received approximately $14.5 million of such grants.
The restrictions under the Innovation Law may impair our ability to enter into agreements which involve IIA-funded products or know-how without the approval of IIA. We cannot be certain that any approval of IIA will be obtained on terms that are acceptable to us, or at all. We may not receive the required approvals should we wish to transfer or license IIA-funded know-how, manufacturing and/or development outside of Israel in the future. Furthermore, in the event that we undertake a transaction involving the transfer to a non-Israeli entity of know-how developed with IIA-funding pursuant to a merger or similar transaction, the consideration available to our shareholders may be reduced by the amounts we are required to pay to the IIA. Any approval, if given, will generally be subject to additional financial obligations. Failure to comply with the requirements under the Innovation Law may subject Cell Cure to mandatory repayment of grants received by it (together with interest and penalties), as well as expose its directors and management to criminal proceedings. In addition, the IIA may from time to time conduct royalty audits. Further grants may not be approved or reduced in the future, which would increase our costs. IIA approval is not required for the marketing or distribution of products resulting from the IIA-funded research or development in the ordinary course of business.
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Our international business exposes us to business, regulatory, political, operational, financial and economic risks associated with doing business outside of the United States.
Cell Cure is our 99% owned subsidiary located in Jerusalem, Israel. OpRegen is currently manufactured at Cell Cure and we anticipate transitioning some or all of the manufacturing of OPC1 and VAC2 to Cell Cure as well. A portion of our OpRegen Phase 1/2a clinical trial has been conducted at sites in Israel. Conducting operations internationally involves a number of risks, including:
| ● | difficulty in staffing and managing foreign operations; | |
| ● | failure by us to obtain the appropriate regulatory approvals; | |
| ● | logistics and regulations associated with shipping drug product or patient samples, including infrastructure conditions and transportation delays; | |
| ● | financial risks, such as longer payment cycles and exposure to foreign currency exchange rate fluctuations; | |
| ● | political and economic instability, including wars, terrorism, and political unrest, outbreak of disease, boycotts, curtailment of trade and other business restrictions; | |
| ● | multiple, conflicting and changing laws and regulations such as tax laws, export and import restrictions, employment laws, data and privacy laws, regulatory requirements and other governmental approvals, permits and licenses; and | |
| ● | regulatory and compliance risks that may fall within the purview of the U.S. Foreign Corrupt Practices Act, UK Bribery Act, anti-boycott laws and other anti-corruption laws. |
Any of these factors could significantly harm our international operations and, consequently, our results of operations. In addition, any failure to comply with applicable legal and regulatory obligations could impact us in a variety of ways that include, but are not limited to, significant criminal, civil and administrative penalties, including imprisonment of individuals, fines and penalties, denial of export privileges, seizure of shipments, and restrictions on certain business activities. Also, the failure to comply with applicable legal and regulatory obligations could result in the disruption of our clinical trial activities.
Our international operations could be affected by changes in laws, trade regulations, labor and employment regulations, and procedures and actions affecting approval, production, pricing, reimbursement and marketing of tests, as well as by inter-governmental disputes. Any of these changes could adversely affect our business.
Our success internationally will depend, in part, on our ability to develop and implement policies and strategies that are effective in anticipating and managing these and other risks in Israel. Failure to manage these and other risks may have a material adverse effect on our operations in Israel and on our business as a whole.
Risks Related to our Intellectual Property
Our intellectual property may be insufficient to protect our products.
Our patents and patent applications are directed to compositions of matter, formulations, methods of use and/or methods of manufacturing, as appropriate. In addition to patenting our own technology and that of our subsidiaries, we have licensed patents and patent applications for certain stem cell technology, hEPC, and hES cell lines, hydrogel technology and other technology from other companies.
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The patent positions of pharmaceutical and biotechnology companies, including ours, are generally uncertain and involve complex legal and factual questions. Our business could be negatively affected by any of the following:
| ● | the claims of any patents that are issued may not provide meaningful protection, may not provide a basis for commercially viable products or may not provide us with any competitive advantages; | |
| ● | our patents may be challenged by third parties; | |
| ● | others may have patents that relate to our technology or business that may prevent us from marketing our product candidates unless we are able to obtain a license to those patents; | |
| ● | the pending patent applications to which we have rights may not result in issued patents; | |
| ● | our patents may have terms that are inadequate to protect our competitive position on our products; | |
| ● | we may not be successful in developing additional proprietary technologies that are patentable. |
In addition, others may independently develop similar or alternative technologies, duplicate any of our technologies and, if patents are licensed or issued to us, design around the patented technologies licensed to or developed by us. As an example, Astellas’ patent portfolio with respect to the manufacture of its RPE products could adversely impact our rights to manufacture OpRegen. Moreover, we could incur substantial costs in litigation if we have to defend ourselves in patent lawsuits brought by third parties or if we initiate such lawsuits.
If we are unable to obtain and enforce patents and to protect our trade secrets, others could use our technology to compete with us, which could limit opportunities for us to generate revenues by licensing our technology and selling products.
Our success will depend in part on our ability to obtain and enforce patents and maintain trade secrets in the United States and in other countries. If we are unsuccessful at obtaining and enforcing patents, our competitors could use our technology and create products that compete with our products, without paying license fees or royalties to us. The preparation, filing, and prosecution of patent applications can be costly and time consuming. Our limited financial resources may not permit us to pursue patent protection of all of our technology and products in all key markets. Even if we are able to obtain issued patents covering our technology or products, we may have to incur substantial legal fees and other expenses to enforce our patent rights to protect our technology and products from infringing uses. We may not have the financial resources to finance the litigation required to preserve our patent and trade secret rights. Litigation, interferences, oppositions, inter partes reviews or other proceedings are, have been and may in the future be necessary in some instances to determine the validity and scope of certain of our proprietary rights, and in other instances to determine the validity, scope or non-infringement of certain patent rights claimed by third parties to be pertinent to the manufacture, use or sale of our products. This means that patents owned or licensed by us may be lost if the outcome of a proceeding is unfavorable to us.
There is no certainty that our pending or future patent applications will result in the issuance of patents.
Our success depends in part on our ability to obtain and defend patent and other intellectual property rights that are important to the commercialization of our products and product candidates. The degree of patent protection that will be afforded to our products and processes in the U.S. and in other important markets remains uncertain and is dependent upon the scope of protection decided upon by the patent offices, courts, administrative bodies and lawmakers in these countries. We can provide no assurance that we will successfully obtain or preserve patent protection for the technologies incorporated into our products and processes, or that the protection obtained will be of sufficient breadth and degree to protect our commercial interests in all countries where we conduct business. If we cannot prevent others from exploiting our inventions, we will not derive the benefit from them that we currently expect. Furthermore, we can provide no assurance that our products will not infringe patents or other intellectual property rights held by third parties.
In Europe, there is uncertainty about the eligibility of hES cell subject matter for patent protection. The European Patent Convention prohibits the granting of European patents for inventions that concern “uses of human embryos for industrial or commercial purposes.” A recent decision at the Court of Justice of the European Union interpreted parthenogenetically produced hES cells as patentable subject matter. Consequently, the European Patent Office now recognizes that human pluripotent stem cells (including human ES cells) can be created without a destructive use of human embryos as of June 5, 2003, and patent applications relating to hES cell subject matter with a filing and priority date after this date are no longer automatically excluded from patentability under Article 53 (a) EPC and Rule 28(c) EPC.
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Intellectual property we may develop using grants received from governments are subject to rights maintained by those governments.
Research and development we perform that is funded by grants from government, and any intellectual property that we create using those grants, is subject to certain rights of the government entities to require that we license or grant rights to the intellectual property developed using government funding in certain circumstances.
There is no certainty that we will be able to obtain licenses to intellectual property rights owned by third parties.
There are no assurances that any of our intellectual property rights will guarantee protection or market exclusivity for our products and product candidates. In such cases, we may need to obtain enabling licenses from third parties to protect our products and product candidates, try to secure market exclusivity or avoid infringing on the intellectual property rights of third parties. If we are unable to fully protect our product candidates or achieve market exclusivity for our products and product candidates, our financial success will be dependent, in part, on our ability to protect and enforce our intellectual property rights, to operate without infringing upon the proprietary rights of others, or, when necessary, our ability to obtain enabling licenses.
If we fail to meet our obligations under license agreements, we may lose our rights to key technologies on which our business depends.
Our business depends on several critical technologies that are based in part on technology licensed from third parties. Those third-party license agreements impose obligations on us, including payment obligations and obligations to pursue development of commercial products under the licensed patents or technology. If a licensor believes that we have failed to meet our obligations under a license agreement, the licensor could seek to limit or terminate our license rights, which could lead to costly and time-consuming litigation and, potentially, a loss of the licensed rights. During the period of any such litigation, our ability to carry out the development and commercialization of potential products, and our ability to raise any capital that we might then need, could be significantly and negatively affected. If our license rights were restricted or ultimately lost, we would not be able to continue to use the licensed technology in our business.
Risks Related to our Dependence on Third Parties
We may become dependent on possible future collaborations to develop and commercialize many of our product candidates and to provide the regulatory compliance, sales, marketing and distribution capabilities required for the success of our business.
We may enter into various kinds of collaborative research and development and product marketing agreements to develop and commercialize our products. The expected future milestone payments and cost reimbursements from collaboration agreements could provide an important source of financing for our research and development programs, thereby facilitating the application of our technology to the development and commercialization of our products, but there are risks associated with entering into collaboration arrangements.
There is a risk we could become dependent upon one or more collaborative arrangements. A collaborative arrangement upon which we might depend might be terminated by our collaboration partner or a partner might determine not to actively pursue the development or commercialization of our products. A collaboration partner also may not be precluded from independently pursuing competing products and drug delivery approaches or technologies.
There is a risk that a collaboration partner might fail to perform its obligations under the collaborative arrangements or may be slow in performing its obligations. In addition, a collaboration partner may experience financial difficulties at any time that could prevent it from having available funds to contribute to the collaboration. If a collaboration partner fails to conduct its product development, commercialization, regulatory compliance, sales and marketing or distribution activities successfully and in a timely manner, or if it terminates or materially modifies its agreements with us, the development and commercialization of one or more product candidates could be delayed, curtailed or terminated because we may not have sufficient financial resources or capabilities to continue such development and commercialization on our own.
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We do not have the ability to independently conduct clinical trials required to obtain regulatory approvals for our product candidates.*
We will need to rely on third parties, such as CROs, data management companies, contract clinical research associates, medical institutions, clinical investigators and contract laboratories to conduct any clinical trials we may undertake for our product candidates. We may also rely on third parties to assist with preclinical development of our product candidates. If we outsource clinical trials, we may not directly control the timing, conduct and expense of our clinical trials. If we enlist third parties to conduct clinical trials and they fail to perform their contractual duties or regulatory obligations or fail to meet expected deadlines, if they need to be replaced or if the quality or accuracy of the data they obtain is compromised due to failing to adhere to our clinical protocols or regulatory requirements or for other reasons, our preclinical development activities or clinical trials may be extended, delayed, suspended or terminated, and we may not obtain regulatory approval for or successfully commercialize our product candidates.
In addition, quarantines, shelter-in-place and similar government orders, or the perception that such orders, shutdowns or other restrictions on the conduct of business operations could occur, related to COVID-19 or other infectious diseases could impact personnel at these third parties, which could disrupt our clinical timelines, which could have a material adverse impact on our business, prospects, financial condition and results of operations.
We have relied on CIRM to fund past clinical trials of OPC1 and we do not know if they will provide additional funding for future studies of OPC1.
We received $14.0 million of funding from CIRM to support clinical development of OPC1. We intend to apply for additional CIRM grants, if available; however, we cannot provide any assurance that such grants will be awarded. If we are unable to obtain another CIRM grant, we will need to raise funds through other mechanisms to support future clinical studies of OPC1, which may take additional time and effort. If capital is not immediately available, this may force us to amend, delay, or discontinue the clinical trial and development work for OPC1 until funding is secured.
We may need to rely on marketing partners or contract sales companies.
If we are able to develop our product candidates and obtain necessary regulatory approvals, we may need to rely on marketing, selling or distributing partners. If we do not partner for commercial services, we will depend on our ability to build our own marketing, selling and distribution capabilities, which would require the investment of significant financial and management resources, or we will need to find collaborative marketing partners, sales representatives or wholesale distributors for the commercial sale of our products.
If we market products through arrangements with third parties, we may pay sales commissions to sales representatives or we may sell or consign products to distributors at wholesale prices. As a result, our gross profit from product sales may be lower than it would be if we sold our products directly to end users at retail prices through our own sales force. There can be no assurance we will able to negotiate distribution or sales agreements with third parties on favorable terms to justify our investment in our products or achieve sufficient revenues to support our operations.
Risks Pertaining to Our Common Shares
Because we are engaged in the development of pharmaceutical and stem cell therapy products, the price of our common shares may rise and fall rapidly.
The market price of our common shares, like that of the shares of many biotechnology companies, has been highly volatile. The price of our common shares may rise rapidly in response to certain events, such as the commencement of clinical trials of an experimental new therapy, even though the outcome of those trials and the likelihood of ultimate FDA approval of a therapeutic product remain uncertain. Similarly, prices of our common shares may fall rapidly in response to certain events such as unfavorable results of clinical trials or a delay or failure to obtain FDA approval. The failure of our earnings to meet analysts’ expectations could result in a significant rapid decline in the market price of our common shares.
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Current economic and stock market conditions may adversely affect the price of our common shares.
The stock market has been experiencing extreme price and volume fluctuations which have affected the market price of the equity securities without regard to the operating performance of the issuing companies. Broad market fluctuations, as well as general economic, political and other conditions (such as the recent coronavirus outbreak), may adversely affect the market price of our common shares.
Because we do not pay cash dividends, our common shares may not be a suitable investment for anyone who needs to earn dividend income.
We do not pay cash dividends on our common shares. For the foreseeable future, we anticipate that any earnings generated in our business will be used to finance the growth of our business and will not be paid out as dividends to holders of our common shares. This means that our common shares may not be a suitable investment for anyone who needs to earn income from their investments.
Insiders continue to have substantial influence over our company, which could limit your ability to influence the outcome of key transactions, including a change of control.
Our directors, executive officers and their affiliates, in the aggregate, owned approximately 28% of our outstanding common shares as of December 31, 2019. As a result, these shareholders, if acting together, will be able to heavily influence or control matters requiring approval by our shareholders, including the election of directors and the approval of mergers, acquisitions or other extraordinary transactions. They may also have interests that differ from yours and may vote in a way with which you disagree, and which may be averse to your interests. This concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deter certain public investors from purchasing our common shares and might ultimately affect the market price of our common shares.
Our business could be negatively affected as a result of actions of activist shareholders, and such activism could affect the trading value of our securities.
Shareholders may, from time to time, engage in proxy solicitations or advance stockholder proposals, or otherwise attempt to effect changes and assert influence on our board of directors and management. Activist campaigns that contest or conflict with our strategic direction or seek changes in the composition of our board of directors could have an adverse effect on our operating results and financial condition. A proxy contest would require us to incur significant legal and advisory fees, proxy solicitation expenses and administrative and associated costs and require significant time and attention by our board of directors and management, diverting their attention from the pursuit of our business strategy. Any perceived uncertainties as to our future direction and control, our ability to execute on our strategy, or changes to the composition of our board of directors or senior management team arising from a proxy contest could lead to the perception of a change in the direction of our business or instability which may result in the loss of potential business opportunities, make it more difficult to pursue our strategic initiatives, or limit our ability to attract and retain qualified personnel and business partners, any of which could adversely affect our business and operating results. If individuals are ultimately elected to our board of directors with a specific agenda, it may adversely affect our ability to effectively implement our business strategy and create additional value for our stockholders. We may choose to initiate, or may become subject to, litigation as a result of the proxy contest or matters arising from the proxy contest, which would serve as a further distraction to our board of directors and management and would require us to incur significant additional costs. In addition, actions such as those described above could cause significant fluctuations in our stock price based upon temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business.
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Securities analysts may not initiate coverage or continue to cover our common shares, and this may have a negative impact on the market price of our common shares.
The trading market for our common shares depends, in part, on the research and reports that securities analysts publish about our business and our common shares. We do not have any control over these analysts. There is no guarantee that securities analysts will cover our common shares. If securities analysts do not cover our common shares, the lack of research coverage may adversely affect the market price of those shares. If securities analysts do cover our common shares, they could issue reports or recommendations that are unfavorable to the price of our common shares, and they could downgrade a previously favorable report or recommendation, and in either case our share prices could decline as a result of the report. If one or more of these analysts does not initiate coverage, ceases to cover our common shares or fails to publish regular reports on our business, we could lose visibility in the financial markets, which could cause our share prices or trading volume to decline.
If we or our subsidiaries issue additional common shares or preferred shares, investors in our common shares may experience dilution of their ownership interests.*
We and our subsidiaries may issue additional common shares or other securities convertible into or exercisable for common shares to raise additional capital or to hire or retain employees or consultants, or in connection with future acquisitions of companies or licenses to technology or rights, or for other business purposes. The future issuance of additional securities may be dilutive to our shareholders and may create downward pressure on the trading price of our common shares.
We are currently authorized to issue an aggregate of 252,000,000 shares of capital stock consisting of 250,000,000 common shares and 2,000,000 “blank check” preferred shares, which means we may issue, without stockholder approval, one or more series of preferred stock having such designation, powers, privileges, preferences, including preferences over our common shares respecting dividends and distributions, terms of redemption and relative participation, optional, or other rights, if any, of the shares of each such series of preferred stock and any qualifications, limitations or restrictions thereof, as our board of directors may determine. The terms of one or more series of preferred stock could dilute the voting power or reduce the value of our common shares. Any preferred shares may also be convertible into common shares on terms that would be dilutive to holders of common shares. Our subsidiaries may also issue their own preferred shares with a similar impact on our ownership of the subsidiaries.
As of September 30, 2020, Lineage had 149,991,454 common shares outstanding, 16,559,980 common shares reserved for issuance upon the exercise of outstanding options under our employee stock option plans, 108,150 common shares reserved for issuance upon the vesting and settlement of restricted stock units under our equity incentive plan, and 1,089,900 common shares subject to warrants.
In addition, in May 2020 we entered into a Controlled Equity OfferingSM Sales Agreement (the “Sales Agreement”) with Cantor Fitzgerald & Co., as sales agent (“Cantor Fitzgerald”), pursuant to which we may, but are not obligated to, raise up to $25.0 million through the sale of common shares from time to time in at-the-market transactions under the Sales Agreement. As of September 30, 2020, no sales had been made under the Sales Agreement.
The operation of some of our subsidiaries has been financed in part through the sale of shares of capital stock and warrants to purchase securities of those subsidiaries to private investors. Future sales of such securities by our subsidiaries could reduce our ownership interest in the applicable subsidiary, and correspondingly dilute our shareholder’s ownership interests in our consolidated enterprise. Certain of our subsidiaries also have their own stock option plans and the exercise of stock options or the sale of restricted stock under those plans would also reduce our ownership interest in the applicable subsidiary, with a resulting dilutive effect on the ownership interest of our shareholders in our consolidated enterprise.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Default Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
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Item 6. Exhibits
| Incorporation by Reference | ||||||||||
| Exhibit Number |
Description | Exhibit Number |
Filing | Filing Date | File No. | |||||
| 3.1 | Restated Articles of Incorporation, as amended | 3.1 | 10-Q | May 10, 2018 | 001-12830 | |||||
| 3.2 | Certificate of Ownership | 3.1 | 8-K | August 12, 2019 | 001-12830 | |||||
| 3.3 | Amended and Restated Bylaws | 3.2 | 8-K | August 12, 2019 | 001-12830 | |||||
| 10.1 | Lease Termination Agreement dated September 11, 2020 | 10.1 | 8-K | September 14, 2020 | 001-12830 | |||||
| 31.1* | Certification of Chief Executive Officer pursuant to Form of Rule 13a-14(a), as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 | |||||||||
| 31.2* | Certification of Chief Financial Officer pursuant to Form of Rule 13a-14(a), as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002 | |||||||||
| 32.1# | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |||||||||
| 101* | Interactive Data File | |||||||||
| 101.INS* | XBRL Instance Document | |||||||||
| 101.SCH* | XBRL Taxonomy Extension Schema | |||||||||
| 101.CAL* | XBRL Taxonomy Extension Calculation Linkbase | |||||||||
| 101.DEF* | XBRL Taxonomy Extension Definition Document | |||||||||
| 101.LAB* | XBRL Taxonomy Extension Label Linkbase | |||||||||
| 101.PRE* | XBRL Taxonomy Extension Presentation Linkbase | |||||||||
| 104* | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
|||||||||
* Filed herewith
# Furnished herewith
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| LINEAGE CELL THERAPEUTICS, INC. | |
| Date: November 4, 2020 | /s/ Brian M. Culley |
| Brian M. Culley | |
| Chief Executive Officer |
| Date: November 4, 2020 | /s/ Brandi L. Roberts |
| Brandi L. Roberts | |
| Chief Financial Officer |
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Exhibit 31.1
CERTIFICATIONS
I, Brian M. Culley, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Lineage Cell Therapeutics, Inc. |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 4, 2020
| /s/ Brian M. Culley | |
| Brian M. Culley | |
| Chief Executive Officer |
Exhibit 31.2
CERTIFICATIONS
I, Brandi L. Roberts, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Lineage Cell Therapeutics, Inc. |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 4, 2020
| /s/ Brandi L. Roberts | |
| Brandi L. Roberts | |
| Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Lineage Cell Therapeutics, Inc. (the “Company”) for the quarter ended September 30, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Brian M. Culley, Chief Executive Officer of the Company, and Brandi L. Roberts, Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| 1. | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: November 4, 2020
| /s/ Brian M. Culley | |
| Brian M. Culley | |
| Chief Executive Officer | |
| /s/ Brandi L. Roberts | |
| Brandi L. Roberts | |
| Chief Financial Officer |