NOTES
TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
1.
Organization and Business Overview
We
are a clinical-stage biotechnology company developing novel cell therapies to address unmet medical needs. Our programs are based on
our proprietary cell-based technology platform and associated development and manufacturing capabilities. From this platform, we design,
develop, manufacture, and test specialized human cells with anatomical and physiological functions similar or identical to cells found
naturally in the human body. Cells which we manufacture are created by applying developmental biological differentiation protocols to
established, well-characterized, and self-renewing pluripotent cell lines. These cells are transplanted into patients and are designed
to (a) replace or support cells that are absent or dysfunctional due to degenerative disease, aging, or traumatic injury, and (b) restore
or augment functional activity in the affected person.
Our
strategy is to efficiently leverage our technology platform and our development, formulation, delivery, and manufacturing capabilities
to advance our programs internally or in conjunction with strategic partners to further enhance their value and probability of success.
As one example, in December 2021 we entered into a Collaboration and License Agreement (the “Roche Agreement”) with F. Hoffmann-La
Roche Ltd and Genentech, Inc., a member of the Roche Group (collectively or individually, “Roche” or “Genentech”),
wherein we granted to Roche exclusive worldwide rights to develop and commercialize retinal pigment epithelium (“RPE”) cell
therapies, including our proprietary cell therapy program known as OpRegen®, for the treatment of ocular disorders, including
geographic atrophy (GA) secondary to age-related macular degeneration (AMD). Under the terms of the Roche Agreement, Lineage received
a $50.0 million upfront payment and is eligible to receive up to $620.0 million in certain developmental, regulatory, and commercialization
milestone payments. Lineage also is eligible to receive tiered double-digit percentage royalties on net sales of OpRegen in the U.S.
and other major markets. See Note 14 (Commitments and Contingencies) to our condensed consolidated interim financial statements included
elsewhere in this report for discussion on the Roche Agreement.
As
of March 31, 2023, we have five allogeneic, or “off-the-shelf,” cell therapy programs in development, of which three have
reached clinical testing:
Product
Candidates
|
● |
OpRegen®,
an allogeneic retinal pigment epithelium (“RPE”) cell replacement therapy currently in a Phase 2a multicenter clinical
trial, being conducted by Genentech, for the treatment of geographic atrophy (GA) secondary
to age-related macular degeneration (AMD), also known as atrophic or dry AMD. A previous Phase 1/2a trial conducted by Lineage
enrolled twenty-four (24) individuals with dry AMD with GA. In December 2021, this program was partnered with Roche for further clinical
development and commercialization. |
|
|
|
|
● |
OPC1,
an allogeneic oligodendrocyte progenitor cell therapy currently in long-term follow-up from a Phase 1/2a multicenter clinical trial
for cervical spinal cord injuries (“SCI”). To date, five (5) patients with thoracic spinal cord injuries and twenty-five
(25) patients with cervical spinal cord injuries have been enrolled in clinical trials of OPC1. The clinical development of OPC1
has been partially funded by $14.3 million received under a grant from the California Institute for Regenerative Medicine (“CIRM”).
Additional clinical trials are being planned. |
|
|
|
|
● |
ANP1,
an allogeneic auditory neuron progenitor cell transplant currently in preclinical development
for the treatment of debilitating hearing loss (“DHL”).
|
|
● |
PNC1,
an allogeneic photoreceptor cell transplant currently in preclinical development for the treatment of vision loss due to photoreceptor
dysfunction or damage. |
|
|
|
|
● |
VAC,
an allogeneic cancer immunotherapy comprised of antigen-presenting dendritic cells. One of the VAC product candidates, VAC2, is currently
in a Phase 1 clinical trial in non-small cell lung cancer (“NSCLC”). This clinical trial is being funded and conducted
by Cancer Research UK (“CRUK”), one of the world’s largest independent cancer research charities. An additional
VAC-based product candidate is in preclinical development with our partner, Immunomic Therapeutics, Inc. (“ITI”), for
the treatment of glioblastoma multiforme (“GBM”). |
Other
Programs
We
have additional undisclosed product candidates being considered for development and which cover a range of therapeutic areas and unmet
medical needs. Generally, these product candidates are based on the same platform technology and employ a similar guided cell differentiation
and transplant approach as the product candidates detailed above, but in some cases may also include genetic modifications designed to
enhance efficacy and/or safety profiles.
In
addition to seeking to create value for shareholders by developing product candidates and advancing those candidates through clinical
development, we also may seek to create value from our intellectual property and additional related technologies and capabilities, through
partnering and/or strategic transactions.
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 generally accepted accounting principles in the United States (“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, 2022 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 the 2022 10-K.
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 subsidiaries as of March 31, 2023.
Schedule
of Lineage’s Ownership of Outstanding Shares of its Subsidiaries
Subsidiary |
|
Field
of Business |
|
Lineage
Ownership |
|
|
Country |
|
Cell
Cure Neurosciences Ltd. |
|
Manufacturing
of Lineage’s product candidates |
|
|
94 |
%(1)(2) |
|
|
Israel |
|
ES
Cell International Pte. Ltd. |
|
Research
and clinical grade cell lines |
|
|
100 |
% |
|
|
Singapore |
|
(1) |
Includes
shares owned by Lineage and ES Cell International Pte. Ltd.
|
|
|
(2) |
As
of December 31, 2021 our ownership percentage of Cell Cure Neurosciences Ltd. (“Cell Cure”) was approximately 99%. In
July 2022, Hadasit Bio-Holdings Ltd exercised its remaining warrants to purchase 21,999 ordinary shares of Cell Cure. Lineage’s
ownership percentage of Cell Cure decreased as a result of the warrant exercise. As of March 31, 2023, our ownership percentage of
Cell Cure was approximately 94%. |
As
of March 31, 2023, 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 condensed consolidated balance sheets.
Liquidity
At
March 31, 2023, we had $46.8 million of cash, cash equivalents and marketable securities. Based on our current operating plan, we believe
that our cash, cash equivalents and marketable securities, together with our projected cash flows, will be sufficient to enable us to
carry out our planned operations through at least twelve months from the issuance date of our condensed consolidated interim financial
statements included elsewhere in this report.
Capital
Resources
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, OncoCyte and AgeX, receipt of proceeds from research grants, revenues from collaborations,
royalties from product sales, and sales of research products and services.
Our
projected cash flows are subject to various risks and uncertainties, including those described and referenced under Part II, Item 1A,
“Risk Factors” of this report.
As
of March 31, 2023, $63.8 million remained available for sale under our at the market offering program. See Note 11 (Shareholders’
Equity) to the condensed consolidated interim financial statements included in this report for additional information.
We
may use our marketable securities for liquidity as necessary and as market conditions allow. The market value of our marketable securities
may not represent the amount that could be realized in a sale of such securities due to various market and regulatory factors, including
trading volume, 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 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 pandemics, including the COVID-19 pandemic, geopolitical conflicts, rising inflation and interest rates, and other macroeconomic
factors.
Additional
Capital Requirements
Our
financial obligations primarily consist of obligations to our licensors under various license agreements, obligations related to grants
received from government entities, including the Israel Innovation Authority (“IIA”), obligations under vendor contracts
to provide research services and other purchase commitments with suppliers.
Our
obligations to licensors under various license agreements and related to grants received from government entities require us to make
future payments relating to sublicense fees, milestone payments, redemption fees, royalties and patent maintenance costs. Sublicense
fees are payable to licensors or government entities when we sublicense underlying intellectual property to third parties; the fees are
based on a percentage of the license fees we receive from sublicensees. Milestone payments, including those related to the Roche Agreement,
are due to licensors or government entities upon future achievement of certain commercial, development and regulatory milestones. Redemption
fees due to the IIA under the Innovation Law are due upon receipt of any milestone and royalties received under the Roche Agreement.
See Note 14 (Commitment and Contingencies) for additional information. Royalties, including those related to royalties we may receive
under the Roche Agreement, are payable to licensors or government entities based on a percentage of net sales of licensed products. Patent
maintenance costs are payable to licensors as reimbursement for the cost of maintaining license patents. Due to the contingent nature
of the payments, the amounts and timing of payments to licensors under our in-license agreements are uncertain and may fluctuate significantly
from period to period. As of March 31, 2023, we have not included these commitments on our condensed consolidated balance sheet because
the achievement and timing of these events are not fixed and determinable.
In
the normal course of business, we enter into services agreements with contract research organizations, contract manufacturing organizations
and other third parties. Generally, these agreements provide for termination upon notice, with specified amounts due upon termination
based on the timing of termination and the terms of the agreement. The amounts and timing of payments under these agreements are uncertain
and contingent upon the initiation and completion of the services to be provided.
Significant
Accounting Policies
We
describe our significant accounting policies in Note 2 to the consolidated financial statements in Item 8 of the 2022 10-K. There have
been no changes to our significant accounting policies during the three months ended March 31, 2023.
Recently
Adopted Accounting Pronouncements
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 fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2022. Lineage adopted this standard on January 1, 2023 and it did not have a significant impact on our condensed
consolidated interim financial statements.
Recently
Issued Accounting Pronouncements Not Yet Adopted – The following recently issued accounting pronouncement that is not yet effective
should be read in conjunction with the recently issued accounting pronouncements discussed in the 2022 10-K.
In
March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on
Financial Reporting. This ASU provides optional guidance for a limited period of time to ease the burden in accounting for (or recognizing
the effects of) reference rate reform on financial reporting. This would apply to companies meeting certain criteria that have contracts,
hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference
rate reform. During 2022, FASB issued ASU 2022-06 Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. ASU
2022-06 extended the sunset date of Topic 848 to December 31, 2024. We are currently assessing the impact the new guidance will have
on our consolidated financial statements.
3.
Revenue
Our
disaggregated revenues were as follows for the periods presented (in thousands):
Schedule
of Disaggregated Revenues
| |
Three
Months Ended March 31, (Unaudited) | |
| |
2023 | | |
2022 | |
| |
| | |
| |
Royalties | |
$ | 265 | | |
$ | 372 | |
| |
| | | |
| | |
Revenues
under collaborative agreements | |
| | | |
| | |
Upfront
license fees | |
$ | 2,121 | | |
$ | 4,865 | |
Total
revenues under collaborative agreements | |
| 2,121 | | |
| 4,865 | |
| |
| | | |
| | |
Total
revenue | |
$ | 2,386 | | |
$ | 5,237 | |
During
the three months ended March 31, 2023, we recognized $2.4 million in total revenue, of which $2.1 million was recognized in collaboration
revenues related to the $50.0 million upfront payment from Roche, which was included in deferred revenues at December 31, 2022. During
the three months ended March 31, 2022, we recognized $5.2 million in total revenue, of which $4.9 million was recognized in collaboration
revenues related to the $50.0 million upfront payment from Roche, which was included in deferred revenues at December 31, 2021.
We
are recognizing the $50.0 million upfront payment under the Roche Agreement utilizing an input method of costs incurred over total estimated
costs to be incurred. At each reporting period, we update our total estimated collaboration costs, and any resulting adjustments are
recorded on a cumulative basis which would affect revenue and net income (loss) in the period of adjustment. We believe the input methodology
represents the most appropriate measure of progress towards satisfaction of the identified performance obligations.
Accounts
receivable and other receivable, net, and deferred revenues (contract liabilities) from contracts with customers, including collaboration
partners, consisted of the following (in thousands):
Schedule of Contract with Customer Contract Liability and Receivable
| |
March
31, 2023 | | |
December
31, 2022 | |
Accounts
receivable and other receivable, net | |
$ | 173 | | |
$ | 297 | |
Deferred
revenues | |
| 35,026 | | |
| 37,146 | |
As
of March 31, 2023, the amounts included in the transaction price of our contracts with customers (ASU 2014-09 – Revenue from
Contracts with Customers (Topic 606)), including collaboration partners, and allocated goods and services not yet provided were $36.6
million, of which $35.0 million has been collected and is reported as deferred revenues, and $1.6 million relates to unfulfilled commitments
related to the ITI collaboration (see Note 14 (Commitments and Contingencies) for additional information), the latter is currently estimated
to be delivered by the end of the first quarter of 2024. Of the total deferred revenues of $35.0 million, approximately $11.0 million
is expected to be recognized within the next 12 months.
4.
Marketable Debt Securities
The
following tables are a summary of available-for-sale debt securities in cash and cash equivalents or marketable securities in the Company’s
condensed consolidated balance sheet as of March 31, 2023 and December 31, 2022 (in thousands):
Summary
of Available for Sale Debt Securities
| |
March
31, 2023 (Unaudited) | |
Financial
Assets: | |
Amortized Cost | | |
Unrealized Gains | | |
Unrealized Losses | | |
Fair Value
| |
U.S.
Treasury securities | |
$ | 30,960 | | |
$ | 1 | | |
$ | (60 | ) | |
$ | 30,901 | |
Total | |
| 30,960 | | |
| 1 | | |
| (60 | ) | |
| 30,901 | |
| |
December
31, 2022 | |
Financial
Assets: | |
Amortized Cost | | |
Unrealized Gains | | |
Unrealized Losses | | |
Fair Value
| |
U.S.
Treasury securities | |
$ | 46,247 | | |
$ | 2 | | |
$ | (152 | ) | |
$ | 46,097 | |
Total | |
| 46,247 | | |
| 2 | | |
| (152 | ) | |
| 46,097 | |
The
Company has not recognized an allowance for credit losses on any securities in an unrealized loss position as of March 31, 2023. We believe
that the individual unrealized losses represent temporary declines resulting from changes in interest rates, and we intend to hold these
marketable securities to their maturity. The Company currently does not intend to sell these securities prior to maturity and does not
consider these investments to be other-than-temporarily impaired at March 31, 2023.
As
of March 31, 2023 the amortized cost and estimated fair value of the Company’s available-for-sale debt securities by contractual
maturity are shown below (in thousands):
Schedule
of Amortized cost And Estimated fair Value
| |
Amortized Cost | | |
Estimated Fair
Value | |
Available-for-sale
debt securities maturing: | |
| | | |
| | |
In
one year or less | |
$ | 30,960 | | |
$ | 30,901 | |
Total
available-for-sale debt securities | |
| 30,960 | | |
| 30,901 | |
As
of March 31, 2023 and December 31, 2022 we did not have any marketable debt securities which were classified as cash equivalents on the
condensed consolidated balance sheets.
5.
Marketable Equity Securities
As
of March 31, 2023, Lineage owned 1.1 million shares of OncoCyte common stock, which had a fair value of $0.4 million as of that date,
based on the closing price of OncoCyte common stock of $0.35 per share on that date.
As
of December 31, 2022, Lineage owned 1.1 million shares of OncoCyte common stock, which had a fair value of $0.4 million as of that date,
based on the closing price of OncoCyte common stock of $0.32 per share on that date.
For
the three months ended March 31, 2023, Lineage recorded a net unrealized gain on marketable equity securities of $0.04 million related
to changes in fair market value of OncoCyte common stock price during the quarter. For the three months ended March 31, 2022, Lineage
recorded a net unrealized loss on marketable equity securities of $0.7 million related to changes in fair market value of OncoCyte’s
common stock price during the quarter.
All
share prices are determined based on the closing price of OncoCyte common stock on the NYSE American on the last day of the applicable
quarter, or the last trading day of the applicable quarter, if the last day of a quarter fell on a day that was not a trading day.
6.
Property and Equipment, Net
At
March 31, 2023 and December 31, 2022 property and equipment, net was comprised of the following (in thousands):
Schedule of Property and Equipment, Net
| |
March
31, 2023 | | |
December
31, 2022 | |
| |
(unaudited) | | |
| |
Equipment,
furniture and fixtures | |
$ | 3,291 | | |
$ | 3,264 | |
Leasehold
improvements | |
| 2,313 | | |
| 2,150 | |
Right-of-use
assets | |
| 6,090 | | |
| 6,109 | |
Accumulated
depreciation and amortization | |
| (6,110 | ) | |
| (5,850 | ) |
Property
and equipment, net | |
$ | 5,584 | | |
$ | 5,673 | |
Property
and equipment for financing leases was $199,000 and $121,000 on March 31, 2023 and December 31, 2022, respectively.
Depreciation
and amortization expense amounted to $138,000 and $150,000 for the three months ended March 31, 2023 and 2022, respectively.
7.
Goodwill and Intangible Assets, Net
At
March 31, 2023 and December 31, 2022 goodwill and intangible assets, net consisted of the following (in thousands):
Schedule of Goodwill and Intangible Assets Net
| |
March
31, 2023 | | |
December
31,
2022 | |
| |
(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 – VAC (from the Asterias Merger) (2) | |
| 14,840 | | |
| 14,840 | |
Intangible
assets subject to amortization: | |
| | | |
| | |
Acquired
patents | |
| 18,953 | | |
| 18,953 | |
Acquired
royalty contracts (3) | |
| 650 | | |
| 650 | |
Total
intangible assets | |
| 66,143 | | |
| 66,143 | |
Accumulated
amortization (4) | |
| (19,484 | ) | |
| (19,451 | ) |
Intangible
assets, net | |
$ | 46,659 | | |
$ | 46,692 | |
(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 14 (Commitment and Contingencies) for further discussion on the Asterias Merger.
|
|
|
(2) |
Asterias
had two in-process research and development (“IPR&D”) intangible assets that
were valued at $46.5 million as part of the purchase price allocation that was performed
in connection with the Asterias Merger. The fair value of these assets consisted of $31.7
million pertaining to the OPC1 program and $14.8 million pertaining to the VAC platform.
|
(3) |
Asterias
had royalty cash flows under certain specific patent families it acquired from Geron Corporation
(“Geron”). Such patents are expected to continue to generate revenue, are not
used in the OPC1 or the VAC platform, and are considered to be separate long-lived intangible
assets under Accounting Standards Codifications (“ASC”) Topic 805, Business
Combinations.
|
(4) |
As
of March 31, 2023 acquired patents were fully amortized and the acquired royalty contracts
had a remaining unamortized balance of approximately $119,000. |
Lineage
amortizes its intangible assets over an estimated period of 5 to 10 years on a straight-line basis. Lineage recognized approximately
$33,000 in amortization expense of intangible assets during each of the three months ended March 31, 2023 and 2022.
Amortization
of intangible assets for periods subsequent to March 31, 2023 is as follows (in thousands):
Schedule of Intangible Assets Future Amortization Expenses
Year
Ending December 31, | |
Amortization
Expense | |
2023 | |
$ | 97 | |
2024 | |
| 22 | |
Total | |
$ | 119 | |
8.
Accounts Payable and Accrued Liabilities
At
March 31, 2023 and December 31, 2022 accounts payable and accrued liabilities consisted of the following (in thousands):
Schedule of Accounts Payable and Accrued Liabilities
| |
March
31, 2023 | | |
December
31,
2022 | |
| |
(unaudited) | | |
| |
Accounts
payable | |
$ | 3,001 | | |
$ | 2,393 | |
Accrued
compensation | |
| 1,810 | | |
| 2,382 | |
Accrued
liabilities (1) | |
| 404 | | |
| 3,833 | |
Other
current liabilities | |
| 37 | | |
| - | |
Total | |
$ | 5,252 | | |
$ | 8,608 | |
(1) |
Decrease
in accrued liabilities was due to a payment made in connection with the settlement of litigation in February 2023 related to the
Asterias Merger. See Note 14 (Commitment and Contingencies) for additional information. |
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. |
We
have not transferred any instruments between the three levels of the fair value hierarchy.
We
measure our money market fund, marketable securities and our liability classified warrants at fair value on a recurring basis. The fair
values of such assets and liabilities were as follows for March 31, 2023 and December 31, 2022 (in thousands):
Schedule of Fair Value of Assets and Liabilities Valued on Recurring Basis
| |
| | |
Fair
Value Measurements Using | |
| |
Balance
at March 31, 2023 | | |
Quoted
Prices in Active Markets for Identical Assets (Level 1) | | |
Significant
Other Observable Inputs (Level 2) | | |
Significant
Unobservable Inputs (Level 3) | |
Assets: | |
| | | |
| | | |
| | | |
| | |
Money
market fund (1) | |
$ | 8,098 | | |
$ | 8,098 | | |
$ | - | | |
$ | - | |
Marketable
debt securities | |
| 30,901 | | |
| 30,901 | | |
| - | | |
| - | |
Marketable
equity securities | |
| 462 | | |
| 462 | | |
| - | | |
| - | |
Total
assets measured at fair value | |
$ | 39,461 | | |
$ | 39,461 | | |
$ | - | | |
$ | - | |
Liabilities: | |
| | | |
| | | |
| | | |
| | |
Warrants
to purchase Cell Cure ordinary shares (2) | |
| 1 | | |
| - | | |
| - | | |
| 1 | |
Total
liabilities measured at fair value | |
$ | 1 | | |
$ | - | | |
$ | - | | |
$ | 1 | |
| |
| | |
Fair
Value Measurements Using | |
| |
Balance
at December 31, 2022 | | |
Quoted
Prices in Active Markets for Identical Assets (Level 1) | | |
Significant
Other Observable Inputs (Level 2) | | |
Significant
Unobservable Inputs (Level 3) | |
Assets: | |
| | | |
| | | |
| | | |
| | |
Money
market fund (1) | |
$ | 4,102 | | |
$ | 4,102 | | |
$ | - | | |
$ | - | |
Marketable
debt securities | |
| 46,097 | | |
| 46,097 | | |
| - | | |
| - | |
Marketable
equity securities | |
| 423 | | |
| 423 | | |
| - | | |
| - | |
Total
assets measured at fair value | |
$ | 50,622 | | |
$ | 50,622 | | |
$ | - | | |
$ | - | |
Liabilities: | |
| | | |
| | | |
| | | |
| | |
Warrants
to purchase Cell Cure ordinary shares (2) | |
| 2 | | |
| - | | |
| - | | |
| 2 | |
Total
liabilities measured at fair value | |
$ | 2 | | |
$ | - | | |
$ | - | | |
$ | 2 | |
|
(1) |
Included
in cash and cash equivalents in the accompanying condensed consolidated balance sheet. |
|
(2) |
Included
in other current liabilities and/or long-term liabilities in the accompanying condensed consolidated balance sheet. |
10.
Related Party Transactions
In
connection with the putative shareholder class action lawsuits filed in February 2019 and October 2019 challenging the Asterias Merger
(see Note 14), Lineage agreed to pay the expenses for the legal defense of Neal Bradsher, a member of the Lineage board of directors,
Broadwood Partners, L.P., a shareholder of Lineage, and Broadwood Capital, Inc., which serves as the general partner of Broadwood Partners,
L.P., all of which were named defendants in the lawsuits, prior to being dismissed. Through March 31, 2023, Lineage has incurred a total
of approximately $620,000 in legal expenses on behalf of the foregoing parties.
11.
Shareholders’ Equity
Preferred
Shares
Lineage
is authorized to issue 2,000,000 preferred shares, no par value. The preferred shares may be issued in one or more series as the Lineage
board of directors may determine by resolution. The Lineage 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. The Lineage 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. As of March 31, 2023 and December 31, 2022, there were no preferred shares issued or
outstanding.
Common
Shares
Lineage
is authorized to issue 250,000,000 common shares, no par value. As of March 31, 2023 and December 31, 2022, there were 170,173,789 and
170,093,114 common shares issued and outstanding, respectively.
At
The Market Offering Program
In
May 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 sell its common shares from time
to time through an “at the market offering” program under the Sales Agreement.
In
March 2021, Lineage filed a prospectus supplement with the SEC in connection with the offer and sale of $25.0 million of common shares
through the ATM program under the Sales Agreement (“March 2021 Prospectus Supplement”).
In
December 2021, Lineage filed a prospectus supplement with the SEC in connection with the offer and sale of up to $64.1 million of common
shares (which included $14.1 million of its common shares which then remained unsold under the March 2021 Prospectus Supplement) through
the ATM program under the Sales Agreement (“December 2021 Prospectus Supplement”). No further sales will be made under the
March 2021 Prospectus Supplement.
As
of March 31, 2023, Lineage had sold 108,200 common shares under the December 2021 Prospectus Supplement at a weighted average price per
share of $2.55 for gross proceeds of $0.3 million. As of March 31, 2023, $63.8 million remained available for sale under the December
2021 Prospectus Supplement, and no shares have been sold in quarter ended March 31, 2023.
The
shares offered under the December 2021 Prospectus Supplement are registered pursuant to Lineage’s effective shelf registration
statement on Form S-3 (File No. 333-237975), which was filed with the SEC on May 1, 2020 and declared effective on May 8, 2020, and Lineage’s
effective shelf registration statement on Form S-3 (File No. 333-254167), which was filed with the SEC on March 5, 2021 and declared
effective on March 19, 2021.
Lineage
agreed to pay Cantor Fitzgerald a commission of 3.0% of the aggregate gross proceeds from the sale of shares under the Sales Agreement,
reimburse its legal fees and disbursements, and provide Cantor Fitzgerald with customary indemnification and contribution rights. The
Sales Agreement may be terminated by Cantor Fitzgerald or Lineage at any time upon notice to the other party, or by Cantor Fitzgerald
at any time in certain circumstances, including the occurrence of a material and adverse change in Lineage’s business or financial
condition that makes it impractical or inadvisable to market the shares or to enforce contracts for the sale of the shares.
Reconciliation
of Changes in Shareholders’ Equity
The
following tables document the changes in shareholders’ equity for the three months ended March 31, 2023 and 2022 (unaudited and
in thousands):
Schedule of Shareholder’s Equity
| |
of
Shares | | |
Amount | | |
of
Shares | | |
Amount | | |
Deficit | | |
(Deficit) | | |
Income/(Loss) | | |
Equity | |
| |
Preferred
Shares | | |
Common
Shares | | |
| | |
Noncontrolling | | |
Accumulated
Other | | |
Total | |
| |
Number | | |
| | |
Number | | |
| | |
Accumulated | | |
Interest/ | | |
Comprehensive | | |
Shareholders’ | |
| |
of
Shares | | |
Amount | | |
of
Shares | | |
Amount | | |
Deficit | | |
(Deficit) | | |
Income/(Loss) | | |
Equity | |
BALANCE
AT DECEMBER 31, 2022 | |
| - | | |
$ | - | | |
| 170,093 | | |
$ | 440,280 | | |
$ | (363,370 | ) | |
$ | (1,403 | ) | |
$ | (3,571 | ) | |
$ | 71,936 | |
Shares
issued upon vesting of restricted stock units, net of shares retired to pay employees’ taxes | |
| - | | |
| - | | |
| 53 | | |
| (37 | ) | |
| - | | |
| - | | |
| - | | |
| (37 | ) |
Shares
issued upon exercise of stock options | |
| - | | |
| - | | |
| 28 | | |
| 25 | | |
| - | | |
| - | | |
| - | | |
| 25 | |
Stock-based
compensation | |
| - | | |
| - | | |
| - | | |
| 1,031 | | |
| - | | |
| - | | |
| - | | |
| 1,031 | |
Unrealized
gain on marketable securities | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 91 | | |
| 91 | |
Foreign
currency translation gain | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 373 | | |
| 373 | |
NET
LOSS | |
| - | | |
| - | | |
| - | | |
| - | | |
| (4,372 | ) | |
| (32 | ) | |
| - | | |
| (4,404 | ) |
BALANCE
AT MARCH 31, 2023 | |
| - | | |
$ | - | | |
| 170,174 | | |
$ | 441,299 | | |
$ | (367,742 | ) | |
$ | (1,435 | ) | |
$ | (3,107 | ) | |
$ | 69,015 | |
| |
Preferred
Shares | | |
Common
Shares | | |
| | |
Noncontrolling | | |
Accumulated
Other | | |
Total | |
| |
Number | | |
| | |
Number | | |
| | |
Accumulated | | |
Interest/ | | |
Comprehensive | | |
Shareholders’ | |
| |
of
Shares | | |
Amount | | |
of
Shares | | |
Amount | | |
Deficit | | |
(Deficit) | | |
Income/(Loss) | | |
Equity | |
BALANCE
AT DECEMBER 31, 2021 | |
| - | | |
$ | - | | |
| 169,477 | | |
$ | 434,529 | | |
$ | (337,097 | ) | |
$ | (1,323 | ) | |
$ | (5,211 | ) | |
$ | 90,898 | |
Beginning balance | |
| - | | |
$ | - | | |
| 169,477 | | |
$ | 434,529 | | |
$ | (337,097 | ) | |
$ | (1,323 | ) | |
$ | (5,211 | ) | |
$ | 90,898 | |
Shares
issued upon vesting of restricted stock units, net of shares retired to pay employees’ taxes | |
| - | | |
| - | | |
| 10 | | |
| (8 | ) | |
| - | | |
| - | | |
| - | | |
| (8 | ) |
Shares
issued upon exercise of stock options | |
| - | | |
| - | | |
| 240 | | |
| 189 | | |
| - | | |
| - | | |
| - | | |
| 189 | |
Subsidiary
warrant exercise | |
| - | | |
| - | | |
| - | | |
| 2 | | |
| - | | |
| - | | |
| - | | |
| 2 | |
Stock-based
compensation | |
| - | | |
| - | | |
| - | | |
| 1,106 | | |
| - | | |
| - | | |
| - | | |
| 1,106 | |
Foreign
currency translation gain | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 124 | | |
| 124 | |
NET
LOSS | |
| - | | |
| - | | |
| - | | |
| - | | |
| (7,087 | ) | |
| (6 | ) | |
| - | | |
| (7,093 | ) |
BALANCE
AT MARCH 31, 2022 | |
| - | | |
$ | - | | |
| 169,727 | | |
$ | 435,818 | | |
$ | (344,184 | ) | |
$ | (1,329 | ) | |
$ | (5,087 | ) | |
$ | 85,218 | |
12.
Stock-Based Awards
Equity
Incentive Plan Awards
In
September 2021, our shareholders approved the Lineage Cell Therapeutics, Inc. 2021 Equity Incentive Plan (the “2021 Plan”),
which became effective upon such approval. The 2021 Plan provides for the grant of incentive stock options, nonstatutory stock options,
stock appreciation rights, restricted stock awards, RSUs, and other stock awards. All of our employees (including those of our affiliates),
non-employee directors and consultants are eligible to participate in the 2021 Plan.
Subject
to adjustment for certain changes in our capitalization, the aggregate number of our common shares that may be issued under the 2021
Plan will not exceed the sum of (i) 15,000,000 shares and (ii) the number of shares subject to awards granted under the Lineage Cell
Therapeutics Inc. 2012 Equity Incentive Plan (the “2012 Plan”) that were outstanding when the 2021 Plan became effective
and are not issued because such awards expire or otherwise terminate. As of March 31, 2023, there were 5,830,827 shares available for
grant under the 2021 Plan.
As
a result of the approval of the 2021 Plan by our shareholders, no additional awards will be granted under the 2012 Plan.
A
summary of activity under the 2021 Plan is as follows (in thousands, except per share amounts):
Schedule of Share-based Compensation, Employee Stock Purchase Plan, Activity
| |
Number
of Options Outstanding | | |
Number
of RSUs Outstanding | | |
Weighted
Average Exercise Price | |
December
31, 2022 | |
| 6,001 | | |
| 939 | | |
$ | 1.40 | |
Options
granted | |
| 5,235 | | |
| - | | |
| 1.46 | |
Options
expired/forfeited/cancelled | |
| (22 | ) | |
| - | | |
| 1.37 | |
RSUs
forfeited | |
| - | | |
| (100 | ) | |
| - | |
RSUs
vested | |
| - | | |
| (80 | ) | |
| - | |
March
31, 2023 | |
| 11,214 | | |
| 759 | | |
$ | 1.43 | |
Options
exercisable at March 31, 2023 | |
| 1,032 | | |
| | | |
$ | 1.40 | |
A
summary of activity of the 2012 Plan, and the 2018 inducement option (which was issued to a Lineage executive outside of all equity plans),
is as follows (in thousands, except per share amounts):
Schedule of Share-based Compensation, Employee Stock Purchase Plan, Activity
| |
Number
of Options Outstanding | | |
Weighted
Average Exercise Price | |
December
31, 2022 | |
| 12,172 | | |
$ | 1.83 | |
Options
exercised | |
| (28 | ) | |
| 0.90 | |
Options
expired/forfeited/cancelled | |
| (46 | ) | |
| 2.32 | |
March
31, 2023 | |
| 12,098 | | |
$ | 1.83 | |
Options
exercisable at March 31, 2023 | |
| 9,289 | | |
$ | 1.79 | |
Stock-based
compensation expense
The
fair value of each option award is estimated on the date of grant using a Black-Scholes option pricing model applying the weighted-average
assumptions noted in the following table:
Schedule of Weighted Average Assumptions to Calculate Fair Value of Stock Options
| |
Three
Months Ended March
31, (unaudited) | |
| |
2023 | | |
2022 | |
Expected
life (in years) | |
| 6.25 | | |
| 6.25 | |
Risk-free
interest rates | |
| 4.2 | % | |
| 1.9 | % |
Volatility | |
| 74.5 | % | |
| 73.4 | % |
Dividend
yield | |
| - | % | |
| - | % |
Operating
expenses include stock-based compensation expense as follows (in thousands):
Schedule of Stock Based Compensation Expense
| |
There
Months Ended March
31, (unaudited) | |
| |
2023 | | |
2022 | |
Research
and development | |
$ | 205 | | |
$ | 215 | |
General
and administrative | |
| 826 | | |
| 891 | |
Total
stock-based compensation expense | |
$ | 1,031 | | |
$ | 1,106 | |
As
of March 31, 2023, total unrecognized compensation costs related to unvested stock options and unvested RSUs under all equity plans (including
the 2018 inducement option), were $13.0 million, which is expected to be recognized as expense over a weighted average period of approximately
3.0 years.
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 restricted stock awards 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 months ended March 31, 2023 and 2022, respectively, Lineage reported a net loss attributable to common shareholders, and therefore,
all potentially dilutive common shares were considered antidilutive for those periods.
The
following common share equivalents were excluded from the computation of diluted net loss per common share for the periods presented
because including them would have been antidilutive (in thousands):
Schedule Of Computation Of Diluted Net Loss Per Common Share
| |
Three
Months Ended March 31, (unaudited) | |
| |
2023 | | |
2022 | |
Stock
options | |
| 23,312 | | |
| 19,665 | |
Restricted
stock units | |
| 759 | | |
| 1,010 | |
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, 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.
Under
ASC 740, 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.
For
the tax years beginning on or after January 1, 2022, the Tax Cuts and Jobs Act of 2017 (“TCJA”) eliminated the option to
currently deduct research and development expenses and requires taxpayers to capitalize and amortize them over five years for research
activities performed in the United States and 15 years for research activities performed outside the United States pursuant to IRC Section
174. Although Congress is considering legislation that would repeal or defer this capitalization and amortization requirement, it is
not certain that this provision will be repealed or otherwise modified. If the requirement is not repealed or replaced, it will decrease
our tax deduction for research and development expenses in future years.
The
2017 Tax Act subjects a U.S. stockholder to Global Intangible Low-Taxed Income (“GILTI”) earned by certain foreign subsidiaries.
In general, GILTI is the excess of a U.S. stockholder’s total net foreign income over a deemed return on tangible assets. The provision
further allows a deduction of 50% of GILTI, however this deduction is limited to the company’s pre-GILTI U.S. income. Lineage incurred
GILTI income during the years 2021 and 2022. For the three months ended March 31, 2023, no GILTI income was included in the Company’s
tax provision.
For
the three months ended March 31, 2023, Lineage recorded a $1.8 million deferred tax benefit that was primarily related to federal net
operating losses generated for the three months ended March 31, 2023. For the three months ended March 31, 2022, Lineage did not record
a deferred tax benefit.
14.
Commitments and Contingencies
Real
Property Leases
Carlsbad
Lease
In
May 2019, Lineage entered into a lease for approximately 8,841 square feet of rentable space in an office park in Carlsbad, California.
The lease was amended in December 2022 and the term was extended for a period of thirty-seven months (the “Extended Term”)
commencing on the later of (i) the date of substantial completion of the landlord’s work or (ii) March 1, 2023 (the “Extended
Term Commencement Date”). The lease expires on March 31, 2026, and rent was abated for months two through four of the Extended
Term. The monthly base rent was $24,666 through the Extended Term Commencement Date, after which it increased to $25,197. As security
for the performance of its obligations under the lease, Lineage provided the landlord a security deposit of $17,850, this amount is included
in deposits and other long-term assets on the condensed consolidated balance sheet as of March 31, 2023.
In
addition to base rent, Lineage pays 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. These pro-rata charges are expensed as incurred and excluded from the calculation of the ROU assets and lease
liabilities.
Carlsbad
Sublease
In
September 2022, Lineage, as sublessee, entered into a sublease for approximately 4,500 square feet of rentable industrial space in Carlsbad,
California for a term that commenced on October 1, 2022 and expires on March 31, 2024. As security for the performance of its obligations
under the sublease, Lineage provided the landlord with a security deposit of $22,500, this amount is included in deposits and other long-term
assets on the condensed consolidated balance sheet as of March 31, 2023. Base rent is $22,500 per month until the lease expires.
Cell
Cure Leases
Cell
Cure leases 728.5 square meters (approximately 7,842 square feet) of office and laboratory space in Jerusalem, Israel under a lease that
expires December 31, 2027, with an option to extend the lease for five years (the “Original Cell Cure Lease”). Base monthly
rent is NIS 39,776 (approximately $12,200 per month). In addition to base rent, Cell Cure pays a pro-rata share of real property taxes
and certain costs related to the operation and maintenance of the building in which the leased premises are located. These pro-rata charges
are expensed as incurred and excluded from the calculation of the ROU assets and lease liabilities.
In
January 2018, Cell Cure entered into a lease for an additional 934 square meters (approximately 10,054 square feet) of office space in
the same facility that expires on December 31, 2027, with an option to extend the lease for five years (the “January 2018 Lease”).
Base rent and construction allowance payments are NIS 93,827 per month (approximately $26,000 per month). Cell Cure has provided a $458,000
security deposit to the landlord to be held as restricted cash during the term of its facility lease, which is included in deposits and
other long-term assets on the condensed consolidated balance sheet as of March 31, 2023.
In
November 2021, Cell Cure entered into a lease for an additional 133 square meters (approximately 1,432 square feet) of office space in
the same facility that commenced on December 1, 2021, and expires on December 31, 2027, with an option to extend the lease for five years.
The base monthly rent was NIS 11,880 (approximately US $3,757) thorough October 31, 2022 and increased to NIS 12,494 (approximately US
$3,951) on November 1, 2022.
In
August 2022, Cell Cure entered into a new lease for 300 square meters (approximately 3,229 square feet) of office and laboratory space
in Jerusalem, Israel that expires on December 31, 2027, with an option to extend the lease for five years. Base monthly rent is 16,350
NIS (approximately $4,800 per month). When executing the new lease, Cell Cure modified the expiration dates and options terms for the
leases identified above to align with the new lease.
Supplemental
Information – Leases
Supplemental
cash flow information related to leases is as follows (in thousands):
Schedule
of Supplemental Cash Flow Information Related to Leases
| |
2023 | | |
2021 | |
| |
Three
Months Ended March
31, | |
| |
2023 | | |
2022 | |
Cash
paid for amounts included in the measurement of lease liabilities: | |
| | | |
| | |
Operating
cash flows from operating leases | |
$ | 315 | | |
$ | 255 | |
Operating
cash flows from financing leases | |
| 2 | | |
| 5 | |
Financing
cash flows from financing leases | |
| 13 | | |
| 8 | |
| |
| | | |
| | |
Right-of-use
assets obtained in exchange for lease obligations: | |
| | | |
| | |
Operating
leases | |
| - | | |
| 33 | |
Finance
leases | |
| 79 | | |
| - | |
Supplemental
balance sheet information related to leases was as follows (in thousands, except lease term and discount rate):
Schedule
of Supplemental Balance Sheet Information Related to Leases
| |
March
31, 2023 | | |
December 31,
2022 | |
Operating
leases | |
| | | |
| | |
Right-of-use
assets, net | |
$ | 3,215 | | |
$ | 3,517 | |
| |
| | | |
| | |
Right-of-use
lease liabilities, current | |
$ | 912 | | |
$ | 916 | |
Right-of-use
lease liabilities, noncurrent | |
| 2,542 | | |
| 2,860 | |
Total
operating lease liabilities | |
$ | 3,454 | | |
$ | 3,776 | |
| |
| | | |
| | |
Financing
leases | |
| | | |
| | |
Right-of-use
assets, net | |
$ | 173 | | |
$ | 105 | |
| |
| | | |
| | |
Lease
liabilities, current | |
$ | 48 | | |
$ | 29 | |
Lease
liabilities, noncurrent | |
| 133 | | |
| 84 | |
Total
finance lease liabilities | |
$ | 181 | | |
$ | 113 | |
| |
| | | |
| | |
Other
current liabilities | |
$ | 3 | | |
$ | 7 | |
Total
finance lease liabilities | |
$ | 184 | | |
$ | 120 | |
| |
| | | |
| | |
Weighted
average remaining lease term | |
| | | |
| | |
Operating
leases | |
| 4.1
years | | |
| 4.3
years | |
Finance
leases | |
| 3.6
years | | |
| 4.1
years | |
Weighted
average discount rate | |
| | | |
| | |
Operating
leases | |
| 6.4 | % | |
| 6.3 | % |
Finance
leases | |
| 6.8 | % | |
| 6.9 | % |
Future
minimum lease commitments are as follows as of March 31, 2023 (in thousands):
Schedule
of Future Minimum Lease Commitments
| |
Operating
Leases | | |
Finance
Leases | |
Year
Ending December 31, | |
| | | |
| | |
2023 | |
$ | 788 | | |
$ | 51 | |
2024 | |
| 957 | | |
| 61 | |
2025 | |
| 885 | | |
| 51 | |
2026 | |
| 647 | | |
| 27 | |
2027 | |
| 685 | | |
| 18 | |
Total
lease payments | |
| 3,962 | | |
| 208 | |
Less
imputed interest | |
| (508 | ) | |
| (24 | ) |
Total | |
$ | 3,454 | | |
$ | 184 | |
Collaborations
Roche
Agreement
In
December 2021, Lineage entered into the Roche Agreement, wherein Lineage granted to Roche exclusive worldwide rights to develop and commercialize
RPE cell therapies, including Lineage’s proprietary cell therapy known as OpRegen, for the treatment of ocular disorders, including
GA secondary to AMD.
Under
the terms of the Roche Agreement, Roche paid Lineage a $50.0 million upfront payment and Lineage is eligible to receive up to an additional
$620.0 million in certain developmental, regulatory and commercialization milestone payments. Lineage also is eligible for tiered double-digit
percentage royalties on net sales of OpRegen in the U.S and other major markets. All regulatory and commercial milestone payments and
royalty payments are subject to the existence of certain intellectual property rights that cover OpRegen at the time such payments would
otherwise become due, and the royalty payments on net sales of OpRegen are subject to financial offsets based on the existence of competing
products. Roche assumed responsibility for further clinical development and commercialization of OpRegen. Lineage is responsible for
completing activities related to the ongoing clinical study, for which enrollment is complete, and performing certain manufacturing and
process development activities.
Unless
earlier terminated by either party, the Roche Agreement will expire on a product-by-product and country-by-country basis upon the expiration
of all of Roche’s payment obligations under the agreement. Roche may terminate the agreement in its entirety, or on a product-by-product
or country-by-country basis, at any time with advance written notice. Either party may terminate the agreement in its entirety with written
notice for the other party’s material breach if such party fails to cure the breach or upon certain insolvency events involving
the other party.
In
January 2022, Lineage received the $50.0 million upfront payment from Roche. Subsequently, Lineage, via Cell Cure, paid $12.1 million
to the IIA, and $8.9 million to Hadasit Medical Research Services and Development Ltd. (“Hadasit’). Such payments were made
in accordance with obligations under the Innovation Law (as discussed below) and under the terms of Cell Cure’s agreements with
Hadasit (as discussed below). The payment to Hadasit was reduced by $1.9 million in accordance with the provisions of such agreements
discussed below that reduce the sublicensing fee payable to Hadasit for costs related to Lineage’s performance obligations under
the Roche Agreement. To the extent such costs are not incurred within five years after the execution of the Roche Agreement, Cell Cure
will be required to pay Hadasit 21.5% of the amount of costs not incurred.
ITI
Collaboration Agreement
Under
Lineage’s collaborative agreement with Immunomic Therapeutics, Inc. (“ITI”), Lineage agreed to perform up to approximately
$2.2 million worth of certain research, development, manufacturing, and oversight activities related to the development of an allogeneic
VAC-CMV product candidate. ITI will reimburse Lineage for these costs and full-time employee costs for the manufacturing of the VAC-CMV
product candidate. As of March 31, 2023, Lineage has a remaining performance obligation of approximately $1.6 million for the forementioned
activities. Upon execution of the agreement, ITI paid Lineage $0.5 million and a subsequent milestone of $0.5 million upon receipt of
research-grade VAC-CMV product generated by Lineage. ITI is currently evaluating its next step under the collaboration agreement.
Agreements
with Hadasit and IIA
The
OpRegen program was supported in part with licenses to technology obtained from Hadasit, the technology transfer company of Hadassah
Medical Center, and through a series of research grants from the IIA, an independent agency created to address the needs of global innovation
ecosystems. A subset of the intellectual property underlying OpRegen was originally generated at Hadassah Medical Center and licensed
to Cell Cure for further development.
Under
the Encouragement of Research, Development and Technological Innovation in the Industry Law 5744, and the regulations (collectively the
“Innovation Law”), guidelines, rules, procedures and benefit tracks thereunder, annual research and development programs
that meet specified criteria and were approved by a committee of the IIA were eligible for grants. The grants awarded were 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.
The
terms of the grants under the Innovation Law generally require that the products developed as part of the programs under which the grants
were given be manufactured in Israel. The know-how developed thereunder may not be transferred outside of Israel unless prior written
approval is received from the IIA. Transfer of IIA-funded know-how outside of Israel is subject to approval and payment of a redemption
fee to the IIA calculated according to formulas provided under the Innovation Law. In November 2021, the IIA research committee approved
an application made by Cell Cure with respect to the grant of an exclusive license and transfer of the technological know-how for OpRegen
to Roche. Under the provisions for the redemption fee, Lineage is obligated to pay the IIA approximately 24.3% of the upfront, milestone,
and royalty payments which may be received under the Roche Agreement, up to an aggregate cap on all payments, such cap growing over time
via interest accrual until paid in full. As of March 31, 2023, the aggregate cap amount was approximately $91.7 million.
Pursuant
to the Second Amended and Restated License Agreement, dated June 15, 2017, between Cell Cure and Hadasit, and a certain letter agreement
entered into on December 17, 2021, Hadasit was entitled to, and was paid, a sublicensing fee of 21.5% of the $50.0 million upfront payment
under the Roche Agreement (subject to certain reductions, including for costs related to Lineage’s performance obligations under
the Roche Agreement) and of any milestone payments, and up to 50% of all royalty payments (subject to a maximum payment of 5% of net
sales of products), Lineage receives under the Roche Agreement. The letter agreement generally terminates upon the termination of the
Roche Agreement.
Second
Amendment to Clinical Trial and Option Agreement and License Agreement with Cancer Research UK
In
May 2020, Lineage and Asterias entered into a Second Amendment to Clinical Trial and Option Agreement (the “CTOA Amendment”)
with CRUK and Cancer Research Technology (“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.
Lineage
and CRT effectuated the option by simultaneously entering into a license agreement (the “CRT License Agreement”) pursuant
to which Lineage agreed to pay the previously agreed signature fee of £1,250,000 (approximately $1.6 million). For the primary
licensed product for the first indication, the CRT License Agreement provides for milestone fees of up to £8,000,000 based upon
initiation of a Phase 3 clinical trial and the filing for regulatory approval and up to £22,500,000 in sales-based milestones payments.
Additional milestone fees and sales-based milestone payments would be payable for other products or indications, and mid-single-digit
royalty payments are payable on sales of commercial products.
Either
party may terminate the CRT License Agreement for the uncured material breach of the other party. CRT may terminate the CRT License Agreement
in the case of Lineage’s insolvency or if Lineage ceases all development and commercialization of all products under the CRT License
Agreement.
Other
Contingent Obligations
Other
than disclosed above, we have obligations under various license agreements and grants received from government entities to make future
payments to third parties, which become due and payable on the achievement of certain development, regulatory and commercial milestones
or on the sublicense of our rights to another party. These commitments include sublicense fees, milestone payments, redemption fees and
royalties. Sublicense fees are payable to licensors or government entities when we sublicense underlying intellectual property to third
parties; the fees are based on a percentage of the license fees we receive from sublicensees. Milestone payments are due to licensors
or government entities upon the future achievement of certain development and regulatory milestones. Redemption fees due to the IIA under
the Innovation Law are due upon receipt of any milestone and royalties received under the Roche Agreement. Royalties are payable to licensors
or government entities based on a percentage of net sales of licensed products. As of March 31, 2023, we have not included these commitments
on our condensed consolidated balance sheet because the achievement and timing of these events are not fixed and determinable.
Litigation
– General
From
time to time, we are subject to legal proceedings and claims in the ordinary course of business. While management presently believes
that the ultimate outcome of these proceedings, individually and in the aggregate, will not materially harm our financial position, cash
flows, or overall trends in results of operations, legal proceedings are subject to inherent uncertainties, and unfavorable rulings or
outcomes could occur that have individually or in aggregate, a material adverse effect on our business, financial condition or operating
results. We are not currently subject to any pending material litigation, other than ordinary routine litigation incidental to our business,
as described above.
Asterias
Merger
In
November 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 pursuant to which Lineage agreed to acquire all of the outstanding common stock
of Asterias in a stock-for-stock transaction (the “Asterias Merger”). The Asterias Merger closed in March 2019.
In
October 2019, a putative class action lawsuit was filed challenging the Asterias Merger. The lawsuit (captioned Ross v. Lineage Cell
Therapeutics, Inc., et al., C.A. No. 2019-0822) was filed in Delaware Chancery Court and named, among other defendants, Lineage, Michael
H. Mulroy, Alfred D. Kingsley, Richard T. LeBuhn and Aditya Mohanty. Messrs. Mulroy and Kingsley are members of the Lineage board of
directors and were former members of the Asterias board of directors. Messrs. LeBuhn and Mohanty were also former members of the Asterias
board of directors, and Mr. Mohanty was a former member of the Lineage board of directors and a former chief executive officer of Lineage.
The lawsuit 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.
In
April 2022, the parties reached an agreement in principle to settle the lawsuit and, in October 2022, the plaintiff, on behalf of himself
and all others similarly situated, Lineage and Messrs. Mulroy, Kingsley, LeBuhn and Mohanty entered into a Stipulation and Agreement
of Compromise and Settlement (the “Settlement Agreement”).
In
February 2023, the court approved the Settlement Agreement. Pursuant to the terms of the Settlement Agreement, Lineage and certain insurers
of the defendants paid $10.65 million (the “Settlement Amount”) into a fund created for the benefit of the purported class
and in consideration for the full and final release, settlement and discharge of all claims. Approximately $7.12 million of the Settlement
Amount was funded by certain insurers and approximately $3.53 million was paid by Lineage in cash.
Lineage
and all defendants have denied, and continue to deny, the claims alleged in the lawsuit and the settlement does not reflect or constitute
any admission, concession, presumption, proof, evidence or finding of any liability, fault, wrongdoing or injury or damages, or of any
wrongful conduct, acts or omissions on the part any defendant.
Premvia
Litigation Settlement
In
July 2019, the Company, along with other named defendants, was sued in the Superior Court of the State of California in a matter captioned
Gonzalez v. Aronowitz, M.D., et al. The plaintiff asserted medical negligence and product liability causes of action relating
to the 2017 and 2018 use in a clinical trial of a product candidate, Premvia, that the Company is no longer developing and has no plans
to pursue, and that is not related to the cell therapy candidates the Company currently is developing. In February 2023, the Company
and the other defendants each entered into settlement agreements with the plaintiff pursuant to which the defendants without admitting
any liability, which the defendants expressly denied, each agreed to pay specified amounts to the plaintiff in exchange for a full settlement
and release and discharge of claims. The Company’s insurance covered the full amount paid by the Company excluding the $25,000
insurance deductible.
HBL
Books and Records Request
On
April 17, 2023, Cell Cure Neurosciences Ltd. (“Cell Cure”), Lineage’s subsidiary, received a motion for disclosure
of documents pursuant to Section 198A of the Israeli Companies Law 5759-1999. The motion was filed in the district court in Tel
Aviv-Yafo by HBL Hadasit Bio-Holdings Ltd. (“HBL”), currently an approximately 5% shareholder of Cell Cure. According to
the motion, the requested production of documents is intended to allow HBL to examine the possibility of pursuing a derivative
action related to, among other things, the validity of an intercompany Collaboration and License Agreement (the “Intercompany
Agreement”) entered into between Lineage and Cell Cure pursuant to which Cell Cure conveyed certain rights and other assets to
Lineage, and Lineage agreed to undertake certain liabilities and obligations of Cell Cure relating to the OpRegen® program. In
its motion, HBL alleges, among other things, that Lineage, in its capacity as Cell Cure’s controlling shareholder, and members
of Cell Cure’s board of directors caused damage to Cell Cure because the Intercompany Agreement was an interested party
transaction that was not fairly priced and exploits Cell Cure’s resources for the benefit of Lineage. The motion seeks an
order to compel Cell Cure to disclose and deliver to HBL the documents described in the motion, such additional, cumulative, or
alternative relief as the court deems appropriate, and reimbursement of HBL’s expenses, including attorneys’ fees.
Lineage disputes the allegations and Cell Cure intends to oppose the motion. 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 agree to indemnify and reimburse other parties, typically Lineage’s clinical research
organizations, investigators, clinical sites, and suppliers, 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
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 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.
Generally, Lineage has not been subject to any material claims or demands for indemnification. Lineage maintains liability insurance
policies that limit its financial exposure under the indemnification agreements. Accordingly, Lineage has not recorded any liabilities
for these agreements as of March 31, 2023 or December 31, 2022.
Royalty
Obligations and License Fees
We
have licensing agreements with research institutions, universities and other parties providing us with certain rights to use intellectual
property in conducting research and development activities in exchange for the payment of royalties on future product sales, if any.
In addition, in order to maintain these licenses and other rights, we must comply with various conditions including the payment of patent
related costs and annual minimum maintenance fees.
As
part of the Asterias Merger, Lineage acquired certain royalty revenues for cash flows generated under certain patent families that Asterias
acquired from Geron Corporation. Lineage continues to make royalty payments to Geron from royalties generated from these patents.
15.
Subsequent Events
HBL
Books and Records Request
On
April 17, 2023, Cell Cure Neurosciences Ltd. (“Cell Cure”), Lineage’s subsidiary, received a motion for disclosure
of documents pursuant to Section 198A of the Israeli Companies Law 5759-1999 and Article 2 of the Israeli Class Action Regulations –
2010 filed by HBL Hadasit Bio-Holdings Ltd., currently an approximately 5% shareholder of Cell Cure. For a discussion of legal proceedings
in which we are involved, see Note 14 (Commitments and Contingencies) in the Notes to the Condensed Consolidated Financial
Statements in Part I, Item 1 of this report.