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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2020

 

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 001-12830

 

Lineage Cell Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

 

California   94-3127919

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

2173 Salk Avenue, Suite 200

Carlsbad, California 92008

(Address of principal executive offices) (Zip code)

 

(Registrant’s telephone number, including area code) (442) 287-8990

 

Securities registered pursuant to Section 12(b) of the Act

 

Title of each class   Trading Symbol   Name of exchange on which registered
Common Stock   LCTX   NYSE American

 

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. ☒ Yes ☐ No

 

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). ☒ Yes ☐ No

 

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 ☒ No

 

The number of common shares outstanding as of November 3, 2020 was 149,991,454.

 

 

 

 
 

 

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,
2020

(Unaudited)

  

December 31,
2019

(Notes 2 and 3)

 
ASSETS          
CURRENT ASSETS          
Cash and cash equivalents  $32,565   $9,497 
Marketable equity securities   5,481    21,219 
Promissory note from Juvenescence (Note 5)   -    23,616 
Trade accounts and grants receivable, net   276    317 
Receivables from affiliates, net   -    7 
Prepaid expenses and other current assets   1,414    2,863 
Total current assets   39,736    57,519 
           
NONCURRENT ASSETS          
Property and equipment, net (Notes 6 and 15)   4,849    8,175 
Deposits and other long-term assets   666    864 
Goodwill   10,672    10,672 
Intangible assets, net   47,167    48,248 
TOTAL ASSETS  $103,090   $125,478 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
CURRENT LIABILITIES          
Accounts payable and accrued liabilities  $7,214   $5,226 
Financing lease and right of use lease liabilities, current portion (Note 15)   488    1,223 
Deferred revenues   46    45 
Liability classified warrants, current portion   3    - 
Total current liabilities   7,751    6,494 
           
LONG-TERM LIABILITIES          
Deferred tax liability   3,137    3,315 
Deferred revenues, net of current portion   -    200 
Right-of-use lease liability, net of current portion (Note 15)   1,800    3,868 
Financing lease, net of current portion   29    77 
Liability classified warrants, net of current portion   189    277 
TOTAL LIABILITIES   12,906    14,231 
           
Commitments and contingencies (Note 15)   -     -  
           
SHAREHOLDERS’ EQUITY          
Preferred shares, no par value, authorized 2,000 shares; none issued and outstanding as of September 30, 2020 and December 31, 2019   -    - 
Common shares, no par value, 250,000 shares authorized; 149,991 shares issued and outstanding as of September 30, 2020 and 149,804 shares issued and outstanding as of December 31, 2019   388,190    387,062 
Accumulated other comprehensive loss   (821)   (681)
Accumulated deficit   (296,103)   (273,422)
Lineage Cell Therapeutics, Inc. shareholders’ equity   91,266    112,959 
Noncontrolling deficit (Note 2)   (1,082)   (1,712)
Total shareholders’ equity   90,184    111,247 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $103,090   $125,478 

 

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)

 

 

   2020   2019   2020   2019 
  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
   2020   2019   2020   2019 
REVENUES:                    
Grant revenue  $229   $350   $864   $1,628 
Royalties from product sales and license fees   342    164    607    390 
Sale of research products and services   -    53    -    256 
Total revenues   571    567    1,471    2,274 
                     
Cost of sales   (102)   (114)   (271)   (289)
                     
Gross profit   469    453    1,200    1,985 
                     
OPERATING EXPENSES:                    
Research and development   3,566    4,266    9,710    14,462 
General and administrative   3,628    4,609    12,055    19,527 
Total operating expenses   7,194    8,875    21,765    33,989 
Loss from operations   (6,725)   (8,422)   (20,565)   (32,004)
OTHER INCOME/(EXPENSES):                    
Interest income, net   252    399    1,037    1,278 
Gain on sale of marketable securities   120    2,055    3,848    2,055 
Gain on sale of equity method in OncoCyte

Corporation (“OncoCyte”)

   -    546    -    546 
Unrealized loss on marketable equity securities   (2,003)   (4,458)   (7,487)   (3,134)
Unrealized (loss)/gain on equity method investment in OncoCyte at fair value   -    (8,287)   -    8,001 
Unrealized gain on equity method investment in Asterias at fair value   -    -    -    6,744 
Unrealized gain on warrant liability   55    79    84    350 
Other income, net   351    582    175    2,270 
Total other (expense) income, net   (1,225)   (9,084)   (2,343)   18,110 
LOSS BEFORE INCOME TAXES   (7,950)   (17,506)   (22,908)   (13,894)
                     
Deferred income tax benefit   178    991    178    6,623 
                     
NET LOSS   (7,772)   (16,515)   (22,730)   (7,271)
                     
Net loss attributable to noncontrolling interest   12    10    49    44 
                     
NET LOSS ATTRIBUTABLE TO LINEAGE CELL THERAPEUTICS, INC.  $(7,760)  $(16,505)  $(22,681)  $(7,227)
                     
NET LOSS PER COMMON SHARE:                    
BASIC  $(0.05)  $(0.11)  $(0.15)  $(0.05)
DILUTED  $(0.05)  $(0.11)  $(0.15)  $(0.05)
                     
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:                    
BASIC   149,973    149,659    149,868    144,097 
DILUTED   149,973    149,659    149,868    144,097 

 

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)

 

   2020   2019   2020   2019 
  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
   2020   2019   2020   2019 
NET LOSS  $(7,772)  $(16,515)  $(22,730)  $(7,271)
Other comprehensive loss, net of tax:                    
Foreign currency translation adjustment, net of tax   (335)   (564)   (140)   (1,783)
COMPREHENSIVE LOSS   (8,107)   (17,079)   (22,870)   (9,054)
Less: Comprehensive loss attributable to noncontrolling interest   12    10    49    44 
COMPREHENSIVE LOSS ATTRIBUTABLE TO LINEAGE CELL THERAPEUTICS, INC. COMMON SHAREHOLDERS  $(8,095)  $(17,069)  $(22,821)  $(9,010)

 

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)

 

   2020   2019 
  

Nine Months Ended

September 30,

 
   2020   2019 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss attributable to Lineage Cell Therapeutics, Inc.  $(22,681)  $(7,227)
Net loss allocable to noncontrolling interest   (49)   (44)
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   -    (8,001)
Unrealized gain on equity method investment in Asterias at fair value   -    (6,744)
Gain on sale of marketable securities   (3,848)   (2,601)
Unrealized loss on marketable equity securities   7,487    3,134 
Deferred income tax benefit   (178)   (6,623)
Depreciation expense, including amortization of leasehold improvements   623    766 
Amortization of right-of-use asset   47    59 
Amortization of intangible assets   1,080    1,500 
Stock-based compensation   1,733    2,961 
Common stock issued for services   59    - 
Gain on write-off and sales of assets   (154)   - 
Change in unrealized gain on warrant liability   (84)   (349)
Write-off of security deposit   150    - 
Amortization of deferred license fee   (200)   - 
Foreign currency remeasurement and other gain   (116)   (1,911)
Changes in operating assets and liabilities:          
Accounts and grants receivable, net   44    634 
Accrued interest receivable   (1,008)   (1,134)
Receivables from OncoCyte and AgeX, net of payables   7    1,948 
Prepaid expenses and other current assets   1,634    (136)
Accounts payable and accrued liabilities   1,342    (2,788)
Deferred revenue and other liabilities   -    132 
Net cash used in operating activities   (14,112)   (26,424)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Proceeds from the sale of OncoCyte common shares   10,941    10,738 
Proceeds from the sale of AgeX common shares   1,196    1,586 
Proceeds from the sale of Hadasit common shares   3    1,231 
Cash and cash equivalents acquired in the Asterias Merger   -    3,117 
Purchase of equipment and other assets   (40)   (433)
Proceeds from sale of equipment   18    - 
Security deposits and other   18    (2)
Net cash provided by investing activities   12,136    16,237 
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from payment of Juvenescence promissory note   24,624    - 
Common shares received and retired for employee taxes paid   (19)   (101)
Reimbursement from landlord on tenant improvements   -    750 
Proceeds from sales of common shares   -   103 
Payments for offering costs   (53)   - 
Repayment of financing lease liabilities   (24)   (20)
Proceeds from Paycheck Protection Program (“PPP”) Loan (Note 8)   523    - 
Proceeds from sale of subsidiary warrants   -    (40)
Repayment of principal portion of promissory notes   -    (70)
Net cash provided by financing activities   25,051    622 
Effect of exchange rate changes on cash, cash equivalents and restricted cash   (36)   128 
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH   23,039    (9,437)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH:          
At beginning of the period   10,096    24,399 
At end of the period  $33,135   $14,962 

 

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 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 (“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 38% of Asterias’ issued and outstanding common stock and accounted for Asterias as an equity method investment.

 

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 0.71 common shares of Lineage for every share of Asterias common stock they owned. Lineage issued 24,695,898 common shares, including 58,085 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 $32.4 million. Lineage also assumed warrants to purchase shares of Asterias common stock.

 

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 3.6 million shares of OncoCyte common stock, or 5.4% of its outstanding shares (see Note 4).

 

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.

 

 Schedule of Lineage's Ownership of Outstanding Shares of its Subsidiaries

Subsidiary  Field of Business  Lineage
Ownership
   Country
Asterias BioTherapeutics, Inc.  Cell therapy clinical development programs in spinal cord injury and oncology   100%  USA
Cell Cure Neurosciences Ltd. (“Cell Cure”)  Products to treat age-related macular degeneration   99% (1)  Israel
ES Cell International Pte. Ltd. (“ESI”)  Stem cell products for research, including clinical grade cell lines produced under cGMP   100%  Singapore
OrthoCyte Corporation  Developing bone grafting products for orthopedic diseases and injuries   99.8%  USA

 

(1) Includes shares owned by Lineage and ESI.

 

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 $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.

 

At September 30, 2020, Lineage had an accumulated deficit of approximately $296.1 million, working capital of $32.0 million and shareholders’ equity of $90.2 million. Lineage has evaluated its projected cash flows and believes that its $38.0 million of cash, cash equivalents and marketable equity securities are sufficient to fund Lineage’s planned operations for at least the next twelve months from the issuance date of the condensed consolidated financial statements included herein. If Lineage needs near term working capital or liquidity to supplement its cash and cash equivalents for its operations, Lineage may sell some, or all, of its marketable equity securities, as necessary.

 

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. On September 11, 2019, Lineage’s ownership percentage decreased from 24% to 16% when it sold 4.0 million shares of OncoCyte common stock. Accordingly, as the ownership percentage was reduced to less than 20%, Lineage is no longer considered to exercise significant influence over OncoCyte and is now accounting for its OncoCyte holdings as marketable equity securities. Prior to the Asterias Merger completed on March 8, 2019, Lineage accounted for its Asterias 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 $46,000.

 

Basic and diluted net income (loss) per share attributable to common shareholders

 

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
 

 

The following weighted average common share equivalents were excluded from the computation of diluted net income (loss) per common share for the periods presented because including them would have been antidilutive (in thousands):

 

   

Three Months Ended

September 30,

(unaudited)

   

Nine Months Ended

September 30,

(unaudited)

 
    2020     2019     2020     2019  
Stock options     17,058       15,941       16,391       15,332  
Lineage Warrants (1) (Note 3)     1,090       1,090       1,090       975  
Restricted stock units     123       236       141       277  

 

(1) Although the Lineage Warrants are classified as liabilities, these warrants are considered for dilutive earnings per share calculations in accordance with ASC 260, Earnings Per Share, and determined to be anti-dilutive for the period presented.

 

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  $32,565   $9,497 
Restricted cash included in deposits and other long-term assets (see Note 15)   570    599 
Total cash, cash equivalents, and restricted cash as shown in the condensed consolidated statements of cash flows  $33,135   $10,096 

  

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.” For lease classification determination, Lineage continues to use: (i) greater than or equal to 75% to determine whether the lease term is a major part of the remaining economic life of the underlying asset; and (ii) greater than or equal to 90% to determine whether the present value of the sum of lease payments is substantially all of the fair value of the underlying asset. Under the available practical expedients, Lineage accounts for the lease and non-lease components as a single lease component. Lineage recognizes right-of-use (“ROU”) assets and lease liabilities for leases with terms greater than twelve months in the condensed consolidated balance sheet.

 

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 $1.9 million and $2.0 million, respectively, which was the carrying value of certain operating leases as of December 31, 2018, included in property and equipment and lease liabilities, respectively, recorded pursuant to build to suit lease accounting under the previous ASC 840 lease standard. The derecognition of these amounts from the superseded ASC 840 lease standard was offset by a cumulative effect adjustment of $0.1 million as a reduction of Lineage’s accumulated deficit on January 1, 2019. These build to suit leases were primarily related to Lineage’s prior leases in Alameda, California and Cell Cure’s leases in Jerusalem, Israel (See Note 15). ASC 842 requires build to suit leases recognized on Lineage’s consolidated balance sheets as of December 31, 2018 to be derecognized upon the adoption of the new lease standard and be recognized in accordance with the new standard on January 1, 2019.

 

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 0.71 common shares of Lineage (the “Merger Consideration”) for every share of Asterias common stock they owned (the “Merger Exchange Ratio”). Lineage issued 24,695,898 common shares, including 58,085 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 $32.4 million.

 

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   21,747,569    34,783,333(1)   56,530,902(1)
Exchange ratio   0.710    0.710    0.710 
                
Lineage common shares issuable   15,440,774(2)   24,695,898(3)   40,136,672 
Per share price of Lineage common shares as of March 8, 2019  $1.31   $1.31   $1.31 
Purchase price (in thousands)  $20,227(2)  $32,353   $52,580 

 

(1) Includes 81,810 shares of Asterias restricted stock unit awards that immediately vested on March 8, 2019 and converted into the right to receive common shares of Lineage based on the Merger Exchange Ratio, resulting in 58,085 common shares of Lineage issued on March 8, 2019 as part of the Merger Consideration. These restricted stock units were principally attributable to pre-combination services and included as part of the purchase price in accordance with ASC 805. See Note 12 for Asterias restricted stock units that vested on the closing of the Asterias Merger attributable to post-combination services that were recorded outside of the purchase price as an immediate charge to stock-based compensation expense.
   
(2) Estimated fair value for Lineage’s previously held 38% ownership interest in Asterias common stock is part of the total purchase price of Asterias for purposes of the purchase price allocation under ASC 805 and for Lineage’s adjustment of its 38% interest to fair value at the effective date of the Asterias Merger and immediately preceding the consolidation of Asterias’ results with Lineage. No actual common shares of Lineage were issued to Lineage in connection with the Asterias Merger.
   
(3) Net of a de minimis number of fractional shares which were paid in cash.

 

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  $3,117 
Prepaid expenses and other assets, current and noncurrent   660 
Machinery and equipment   308 
Long-lived intangible assets - royalty contracts   650 
Acquired in-process research and development (“IPR&D”)   46,540 
      
Total assets acquired   51,275 

 

Liabilities assumed:     
Accrued liabilities and accounts payable   982 
Liability classified warrants   867 
Deferred license revenue   200 
Long-term deferred income tax liability   10,753 
      
Total liabilities assumed   12,802 
      
Net assets acquired, excluding goodwill (a)   38,473 
      
Fair value of Lineage common shares held by Asterias (b)   3,435 
      
Total purchase price (c)   52,580 
      
Estimated goodwill (c-a-b)  $10,672 

 

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”)  $46,540    n/a 
Royalty contracts   650    5 
   $47,190      

 

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 $31.7 million pertaining to the OPC1 program that is currently in a Phase 1/2a clinical trial for SCI, which has been partially funded by the California Institute for Regenerative Medicine and $14.8 million pertaining to the VAC2 program, which is an allogeneic, or “off-the-shelf,” cancer immunotherapy derived from pluripotent stem cells for which a clinical trial in non-small cell lung cancer is being funded and sponsored by Cancer Research UK. The identification of these intangible assets are based on consideration of historical experience and a market participant’s view further discussed below; collectively, OPC1 and VAC2 are referred to as the “AST-Clinical Programs”. These intangible assets are valued primarily through the use of a probability weighted discounted cash flow method under the income approach further discussed below. Lineage considered Asterias’ VAC1 program, which is an autologous, or patient-specific, cancer immunotherapy derived from the patient’s own cells, to have de minimis value due to significant risks, substantial costs and limited opportunities.

 

Lineage determined that the estimated aggregate fair value of the AST-Clinical programs was $46.5 million as of the acquisition date using a probability weighted discounted cash flow method for each respective program. This approach estimates the probability of the AST-Clinical Programs achieving successful completion of remaining clinical trials and related approvals into the valuation technique.

 

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 five years. The discounted cash flow method estimated the amount of net royalty income that can be expected under the contracts in future years. The amounts were based on observed historical trends in the growth of these revenue streams, and were estimated to terminate in approximately five years, when the key patents under these contracts will begin to expire. The resulting cash flows were discounted to the valuation date based on a rate of return that recognizes a lower level of risk associated with these assets as compared to the AST-Clinical programs discussed above.

 

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 $1.0 million, in exchange for a 24-month period option to negotiate a non-exclusive license during which time Asterias has agreed to not grant any exclusive licenses inconsistent with the Novo Nordisk option. This option was considered a performance obligation as it provided Novo Nordisk with a material right that it would not receive without entering into the contract.

 

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 $200,000 in the purchase price allocation. This amount was originally recorded as deferred revenue and subsequently recognized as revenue in September 2020 when Novo Nordisk did not exercise the option.

 

Liability classified warrants - On May 13, 2016, in connection with a common stock offering, Asterias issued warrants to purchase 2,959,559 shares of Asterias common stock (the “Asterias Warrants”) with an exercise price of $4.37 per share that expire on May 13, 2021. As of the closing of the Asterias Merger, there were 2,813,159 Asterias Warrants outstanding. The Asterias Warrants contain certain provisions in the event of a Fundamental Transaction, as defined in the warrant agreement governing the Asterias Warrants (“Warrant Agreement”), that Asterias or any successor entity will be required to purchase, at a holder’s option, exercisable at any time concurrently with or within thirty days after the consummation of the Fundamental Transaction, the Asterias Warrants for cash in an amount equal to the calculated value of the unexercised portion of such holder’s warrants, determined in accordance with the Black-Scholes option pricing model with significant inputs as specified in the Warrant Agreement. The Asterias Merger was a Fundamental Transaction for purposes of the Asterias Warrants.

 

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 100% and net cash settlement occurring, using the contractual remaining term of the warrants. In applying these models, these inputs included key assumptions including the per share closing price of Lineage common shares on March 8, 2019, volatility computed in accordance with the provisions of the Warrant Agreement and, to a large extent, assumptions based on discussions with a majority of the holders of the Asterias Warrants since the closing of the Asterias Merger to settle the Asterias Warrants in cash or in common shares of Lineage. Based on such discussions, Lineage believes the fair value of the Asterias Warrants as of the closing of the Asterias Merger is not subject to change significantly, however, to the extent any Asterias Warrants that were not settled in cash or in Lineage common shares discussed below, were automatically converted to Lineage warrants 30 days after the closing of the Asterias Merger. In April 2019, Asterias Warrants representing approximately $372,000 in fair value were settled: $332,000 in fair value was settled in exchange for 251,835 common shares of Lineage, and $40,000 in fair value was settled in exchange for cash. The Asterias Warrants settled in exchange for common shares of Lineage were held by Broadwood Partners, L.P., an Asterias and Lineage shareholder. The Asterias Warrants settled in exchange for cash were held by other parties. The remaining Asterias Warrants (representing approximately $495,000 in fair value as of March 31, 2019) were converted into warrants to purchase common shares of Lineage using the Merger Exchange Ratio (the “Lineage 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 1,089,900, with similar terms and conditions retained under the Lineage Warrants as per the original Warrant Agreements. The Lineage Warrants have an exercise price of $6.15 per warrant share and expire on May 13, 2021.

 

15
 

 

Fair value of Lineage common shares held by Asterias - As of March 8, 2019, Asterias held 2,621,811 common shares of Lineage as marketable securities on its standalone financial statements. The fair value of those shares acquired by Lineage from Asterias is determined based on the $1.31 per share closing price of Lineage common shares on March 8, 2019. Although treasury shares are not considered an asset and were retired upon Lineage’s acquisition of Asterias, the fair value of those shares is a part of the purchase price allocation shown in the tables above. These Lineage shares were retired at the completion of the Asterias Merger.

 

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 $0.7 million and $4.4 million for the nine months ended September 30, 2020 and 2019, respectively.

 

Prior to the consummation of the Asterias Merger in March 2019, Lineage elected to account for its 21.7 million shares of Asterias common stock at fair value using the equity method of accounting. The fair value of the 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: (a) $1.31, the closing price of Lineage common shares on such date; by (b) the Merger Exchange Ratio. The fair value of the 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, Lineage 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. All share prices were determined based on the closing price of Lineage or Asterias common stock on the NYSE American on the applicable dates.

 

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 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. The calculation of fair value is the same under the equity method and as a marketable equity security.

 

As of December 31, 2019, Lineage owned approximately 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 of $2.25 per share on December 31, 2019. During the nine months ended September 30, 2020, Lineage sold approximately 4.8 million shares of OncoCyte common stock for net proceeds of $10.9 million.

 

As of September 30, 2020, Lineage owned approximately 3.6 million shares of OncoCyte common stock, or 5.4%, which had a fair value of approximately $5.0 million, based on the closing price of OncoCyte 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 remaining shares owned by Lineage 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.

 

16
 

 

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.

 

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 14.4 million shares of common stock of AgeX to Juvenescence for $3.00 per share, or an aggregate purchase price of $43.2 million (the “Purchase Price”). Juvenescence paid $10.8 million of the Purchase Price at closing, issued an unsecured convertible promissory note dated August 30, 2018 in favor of Lineage for $21.6 million (the “Promissory Note”), and paid $10.8 million on November 2, 2018. The Stock Purchase Agreement contains customary representations, warranties and indemnities from Lineage relating to the business of AgeX, including an indemnity cap of $4.3 million, which is subject to certain exceptions. In connection with the sale, Lineage also entered into a Shared Facilities Agreement with AgeX (see Note 10).

 

The Promissory Note bore interest at 7% per annum, with principal and accrued interest payable at maturity on August 30, 2020. The Promissory Note was paid in full on August 28, 2020.

 

For the three and nine months ended September 30, 2020, Lineage recognized $252,000 and $1,008,000, respectively, in interest income on the Promissory Note.

 

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  $4,084   $4,148 
Leasehold improvements   2,863    2,862 
Right-of-use assets (1)   3,992    5,756 
Accumulated depreciation and amortization   (6,090)   (4,591)
Property and equipment, net  $4,849   $8,175 

 

(1) Lineage adopted ASC 842 on January 1, 2019. For additional information on this standard and right-of-use assets and liabilities (see Notes 2 and 15).

 

17
 

 

Property and equipment at September 30, 2020 and December 31, 2019 includes $80,000 and $96,000 in financing leases, respectively. In September 2020, Lineage terminated its leases in Alameda and entered into a new lease for a reduced amount of square footage. This resulted in a reduction to right-of-use assets of approximately $1.8 million. See additional information in Note 15.

 

Depreciation and amortization expense amounted to $200,000 and $253,000 for the three months ended September 30, 2020 and 2019, and $623,000 and $766,000 for the nine months ended September 30, 2020 and 2019, respectively. During the three and nine months ended September 30, 2020, Lineage sold equipment with net book values of $39,000 and $52,000, respectively, and recognized losses of $32,000 and $34,000, respectively. Additionally, Lineage sold non-capitalized assets for a net gain of $67,000. Both the gain and losses are included in research and development expenses on the statement of operations.

 

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)  $10,672   $10,672 
           
Intangible assets:          
Acquired IPR&D - OPC1 (from the Asterias Merger)(2)  $31,700   $31,700 
Acquired IPR&D - VAC2 (from the Asterias Merger)(2)   14,840    14,840 
Intangible assets subject to amortization:          
Acquired patents   18,953    18,953 
Acquired royalty contracts(2)   650    650 
Total intangible assets   66,143    66,143 
Accumulated amortization   (18,976)   (17,895)
Intangible assets, net  $47,167   $48,248 

 

(1) Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired and liabilities assumed in the Asterias Merger (see Note 3).
   
(2) See Note 3 for information on the Asterias Merger which was consummated on March 8, 2019.

 

Amortization recognized in research and development expenses was $0.2 million and $0.5 million for the three months ended September 30, 2020 and 2019, and $1.0 million and $1.4 million for the nine months ended September 30, 2020 and 2019, respectively.

 

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  $3,155   $2,427 
Accrued compensation   1,504    1,549 
Accrued liabilities   2,027    1,246 
PPP loan payable   523    - 
Other current liabilities   5    4 
Total  $7,214   $5,226 

 

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Accounts payable includes $0.6 million and accrued expenses includes $1.0 million for a total of $1.6 million (£1.25 million) related to the signature fee owed to Cancer Research UK, as described in Note 15.

 

PPP Loan Payable

 

In April 2020, Lineage received a loan for $523,000 from Axos Bank under the PPP contained within the new Coronavirus Aid, Relief and Economic Security (“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, Lineage will be 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 Lineage maintains its employment 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 Lineage, all or part of such loan could be forgiven. Lineage believes that all or a substantial portion of the PPP loan is eligible for forgiveness within one year and classifies the loan as a short-term liability. However, Lineage cannot provide any assurance whether the PPP loan will ultimately be forgiven by the SBA. Any forgiven amounts will not be included in Lineage’s taxable income. Lineage applied for full forgiveness of the PPP loan on September 30, 2020.

 

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 $2.0 million, which such conditions were met on the Asterias Merger date. Accordingly, $2.0 million was accrued and recorded in general and administrative expenses on the merger date and paid in April 2019.

 

Additionally, Lineage entered into a plan of termination with substantially all other previous employees of Asterias with potential separation payments in the aggregate of $0.5 million. Termination dates for these individuals ranged from May 31, 2019 to June 28, 2019. These employees were required to provide services related to the transition and be an employee of the combined company as of their date of termination in order to receive separation benefits. Since the employees were required to render future services after the merger date, Lineage recorded the aggregate liability ratably over their respective service periods from the Asterias Merger date through the above termination dates, in accordance with ASC 420, Exit or Disposal Cost Obligations. All payments were completed by July 31, 2019.

 

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 $0.7 million. Termination dates for these individuals range from August 9, 2019 to September 30, 2019. These employees had to provide services related to the transition of services and activities in connection with the relocation and be an employee of Lineage as of their date of termination in order to receive separation benefits. Lineage recorded the aggregate liability ratably over their respective service periods from June 2019 through the above termination dates, in accordance with ASC 420. As of December 31, 2019, all separation payments had been made.

 

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.

 

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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): 

 

 Schedule of Fair Value of Assets and Liabilities Valued on Recurring Basis

       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  $32,565   $32,565   $-   $- 
Marketable securities   5,481    5,481    -    - 
                     
Liabilities:                    
Lineage Warrants   2    -    -    2 
Cell Cure Warrants   190    -    -    190 

 

          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   $ 9,497     $ 9,497     $      -     $ -  
Marketable securities     21,219       21,219       -       -  
                                 
Liabilities:                                
Lineage Warrants     20       -       -       20  
Cell Cure Warrants     257       -       -       257  

 

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 $13,000 and $18,000 on the Lineage Warrants, respectively, which was primarily related to the reduction in the remaining life of the warrants.

 

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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 $41,000 and $66,000 on the Cell Cure Warrants, respectively, primarily related to the reduction in the remaining life of the