Item 7. Management’s Discussion and Analysis
ITEM
7.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide information
necessary to understand our audited consolidated financial statements for the two-year period ended December 31, 2020, and highlight
certain other information which, in the opinion of management, will enhance a reader’s understanding of our financial condition,
changes in financial condition and results of operations. In particular, the discussion is intended to provide an analysis of
significant trends and material changes in our financial position and the operating results of our business during the year ended
December 31, 2020 as compared to the year ended December 31, 2019. This discussion should be read in conjunction with our consolidated
financial statements and related notes included elsewhere in this Report. These historical financial statements may not be indicative
of our future performance. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains
a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties
and risks described throughout this Report, particularly in “Item 1A. Risk Factors.”
Overview
We
are a clinical-stage biotechnology company developing novel cell therapies for unmet medical needs. Our focus is to develop therapies
for degenerative retinal diseases, neurological conditions associated with demyelination, and aiding the body in detecting and
combating cancer. Specifically, we are testing therapies to treat dry age-related macular degeneration (“AMD”), spinal
cord injuries, and non-small cell lung cancer. Our programs are based on our proprietary cell-based therapy platform and associated
development and manufacturing capabilities. From this platform, we develop and manufacture specialized, terminally or functionally differentiated human cells from established and well-characterized pluripotent cell lines. These differentiated
cells are developed either to replace or support cells that are dysfunctional or absent due to degenerative disease or traumatic
injury, or are administered as a means of helping the body mount an effective immune response to cancer.
We
have three allogeneic, or “off-the-shelf,” cell therapy programs in clinical development:
●
OpRegen ® ,
a retinal pigment epithelium cell replacement therapy currently in a Phase 1/2a multicenter clinical trial for the treatment
of advanced dry AMD with geographic atrophy. There currently are no therapies approved by the U.S. Food and Drug Administration
(“FDA”) for dry AMD, which accounts for approximately 85-90% of all AMD cases and is the leading cause of blindness
in people over the age of 60.
●
OPC1 ,
an oligodendrocyte progenitor cell therapy currently in a Phase 1/2a multicenter clinical trial for acute spinal cord injuries.
This clinical trial has been partially funded by the California Institute for Regenerative Medicine.
●
VAC2 ,
an allogeneic 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
completed its merger (the “Asterias Merger”) with Asterias Biotherapeutics, Inc. (“Asterias”) on March
8, 2019, which incorporated OPC1 and VAC2 into its cell therapy product portfolio.
In
addition to seeking to create value for shareholders by developing product candidates and other technologies through our clinical
development programs, we also seek to create value from our technologies through partnering and strategic transactions. We founded
two companies that later became publicly traded companies: OncoCyte Corporation (“OncoCyte”) and AgeX Therapeutics,
Inc. (“AgeX”).
During
the year ended December 31, 2020, we received approximately $12.6 million in gross proceeds in connection with our sale of shares
of OncoCyte and AgeX. In August 2020, we also received $24.6 million from Juvenescence Limited (“Juvenescence”), representing
principal and accrued interest under a promissory note we received in connection with our sale of AgeX shares to Juvenescence in
August 2018.
We
no longer hold any common stock in AgeX. The value of our OncoCyte holdings as of March 5, 2021, was approximately $4.2
million, based on the closing price of its common stock on that date. In this Report, see Part I, Item 1A, “Risk Factors—Risks
Related to Our Business Operations and Capital Requirements—The value of our investments in public companies fluctuates
based on their respective stock prices and could be negatively affected by poor business performance.”
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Though
our principal focus is on advancing our three cell therapy programs in clinical development, we may seek to create additional
value through corporate transactions, as we have in the past.
Critical
Accounting Policies
The
preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States
(“GAAP”) requires management to make estimates and assumptions that affect the reported amounts in our consolidated
financial statements and related notes. Our significant accounting policies are described in Note 2 to our consolidated financial
statements included elsewhere in this Report. We have identified below our critical accounting policies and estimates that we
believe require the greatest amount of judgment. On an ongoing basis, we evaluate estimates which are subject to significant judgment,
including those related to going concern assessment of our consolidated financial statements, useful lives associated with long-lived
assets, including evaluation of asset impairment, allowances for uncollectible accounts and financing receivables, v aluing
shares owned in nonconsolidated companies using the equity method of accounting, loss contingencies, deferred income taxes
and tax reserves, including valuation allowances related to deferred income taxes, and assumptions used to value stock-based awards,
debt or other equity instruments. Actual results could differ materially from those estimates. On an ongoing basis, we evaluate
our estimates compared to historical experience and trends which form the basis for making judgments about the carrying value
of assets and liabilities. To the extent that there are material differences between our estimates and our actual results, our
future financial statement presentation, financial condition, results of operations and cash flows will be affected.
We
believe the assumptions and estimates associated with the following have the greatest potential impact on our consolidated financial
statements.
Business
Combinations – We account for business combinations, such as the Asterias Merger, in accordance with Accounting Standards
Codification (“ASC”) Topic 805, Business Combinations , which requires the purchase price to be measured at
fair value. When the purchase consideration consists entirely of our common shares, we calculate the purchase price by determining
the fair value, as of the acquisition date, of shares issued in connection with the closing of the acquisition. We recognize estimated
fair values of the tangible assets and intangible assets acquired, including in-process research and development (“IPR&D”),
and liabilities assumed as of the acquisition date, and we record as goodwill any amount of the fair value of the tangible and
intangible assets acquired and liabilities assumed in excess of the purchase price.
Goodwill
and IPR&D – Goodwill is calculated as the difference between the acquisition date fair value of the consideration
transferred and the values assigned to the assets acquired and liabilities assumed. Goodwill is not amortized but is tested for
impairment at least annually, or more frequently if circumstances indicate potential impairment. IPR&D assets are indefinite-lived
intangible assets until the completion or abandonment of the associated research and development (“R&D”) efforts.
Once the R&D efforts are completed or abandoned, the IPR&D will either be amortized over the asset life as a finite-lived
intangible asset or be impaired, respectively, in accordance with ASC 350, Intangibles – Goodwill and Other . In accordance
with ASC 350, goodwill and acquired IPR&D are determined to have indefinite lives and, therefore, are not amortized. Instead,
they are tested for impairment at least annually and between annual tests if we become aware of an event or a change in circumstances
that would indicate the asset may be impaired.
Leases
– We account for leases in accordance with ASC 842, Leases . We determine if an arrangement is a lease at inception.
Leases are classified as either financing or operating, with classification affecting the pattern of expense recognition in the
consolidated statements of operations. Under the available practical expedients for the adoption of ASC 842, we account for the
lease and non-lease components as a single lease component. We recognize right-of-use (“ROU”) assets and lease liabilities
for leases with terms greater than twelve months in the consolidated balance sheet. ROU assets represent our right to use an underlying
asset during the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating
lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease
term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available
at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The
operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options
to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments
is recognized on a straight-line basis over the lease term. Operating leases are included as right-of-use assets in property and
equipment, and ROU lease liabilities, current and long-term, in the consolidated balance sheets. Financing leases are included
in property and equipment, and in financing lease liabilities, current and long-term, in the consolidated balance sheets. We disclose
the amortization of our ROU assets and operating lease payments as a net amount, “Amortization of ROU assets”, on
the consolidated statement of cash flows.
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Going
concern assessment – In accordance with Accounting Standards Update (“ASU”) 2014-15, Presentation of
Financial Statements – Going Concern , we assess going concern uncertainty in our consolidated financial statements to
determine if we have sufficient cash and cash equivalents on hand and working capital to operate for a period of at least one
year from the date our consolidated financial statements are issued or are available to be issued, which is referred to as the
“look-forward period” as defined by ASU No. 2014-15. As part of this assessment, based on conditions that are known
and reasonably knowable to us, we will consider various scenarios, forecasts, projections, and estimates, and we will make certain
key assumptions, including the timing and nature of projected cash expenditures or programs, and our ability to delay or curtail
those expenditures or programs, if necessary, among other factors. Based on this assessment, as necessary or applicable, we make
certain assumptions concerning our ability to curtail or delay research and development programs and expenditures to the extent
we deem probable those implementations can be achieved and we have the proper authority to execute them within the look-forward
period in accordance with ASU 2014-15.
Marketable
Equity Securities – We account for our shares in OncoCyte and HBL (and previously AgeX) 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 .
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).
Prior
to September 11, 2019, we accounted for our 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%, we are no longer considered to exercise significant influence
over OncoCyte and are now accounting for our OncoCyte holdings as marketable equity securities. Prior to the Asterias Merger completed
on March 8, 2019, we accounted for our Asterias shares held at fair value, using the equity method of accounting.
Royalties
from product sales and license fees – Lineage’s performance obligations in agreements with certain customers is
to provide a license to allow customers to make, import and sell company licensed products or methods for preclinical studies
and commercial use. Customers pay a combination of a license issue fee paid up front and a sales-based royalty, if any, in some
cases with yearly minimums. The transaction price is deemed to be the license issue fee stated in the contract. The license offered
by Lineage is a functional license with significant standalone functionality and provides customers with the right to use Lineage’s
intellectual property. This allows Lineage to recognize revenue on the license issue fee at a point in time at the beginning of
the contract, which is when the customer begins to have use of the license. Variable consideration related to sales-based royalties
is recognized only when (or as) the later of one or more of the following events occur: (i) a sale or usage occurs; or (ii) the
performance obligation to which some, or all, of the sales-based or usage-based royalty that has been allocated and has been satisfied
or partially satisfied. Due to the contract termination clauses, Lineage does not expect to receive all of the minimum royalty
payments throughout the term of the agreements. Therefore, Lineage fully constrains recognition of the minimum royalty payments
as revenues until its customers are obligated to pay, which is generally within 60 days prior to the beginning of each year the
minimum royalty payments are due.
Grant
revenues – In applying the provisions of Topic 606, Lineage has determined that government grants are out of the scope
of Topic 606 because the government entities do not meet the definition of a “customer”, as defined by Topic 606,
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.
58
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.
Long-lived
intangible assets – Long-lived intangible assets, consisting primarily of acquired patents, patent applications, and
licenses to use certain patents are stated at acquired cost, less accumulated amortization. Amortization expense is computed using
the straight-line method over the estimated useful lives of the assets, generally over five to ten years.
Impairment
of long-lived assets – Our long-lived assets, including long-lived intangible assets, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If an impairment
indicator is present, we evaluate recoverability by a comparison of the carrying amount of the assets to future undiscounted net
cash flows expected to be generated by the assets. If the assets are impaired, the impairment recognized is measured by the amount
by which the carrying amount exceeds the estimated fair value of the assets.
Research
and development – Research and development expenses consist of costs incurred for company-sponsored, collaborative and
contracted research and development activities. These costs include direct and research-related overhead expenses including compensation
and related benefits, stock-based compensation, consulting fees, research and laboratory fees, rent of research facilities, amortization
of intangible assets, and license fees paid to third parties to acquire patents or licenses to use patents and other technology.
We expense research and development costs as incurred. Research and development expenses incurred and reimbursed by grants from
third parties approximate the grant income recognized in the consolidated statements of operations.
Stock-based
compensation – We follow accounting standards governing share-based payments, which require the measurement and recognition
of compensation expense for all share-based compensation awards made to directors and employees, including employee stock options,
based on estimated fair values. We utilize the Black-Scholes option pricing model. Our determination of fair value of share-based
payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding
a number of complex and subjective variables. These variables include, but are not limited to, expected stock price volatility
over the term of the awards, and the expected term of options granted, which is derived using the simplified method, which is
an average of the contractual term of the option and its vesting period, as we do not have sufficient historical exercise data.
The risk-free rate is based on the U.S. Treasury yield in effect at the time of grant for zero coupon U.S. Treasury notes with
maturities similar to the expected term of the awards. Forfeitures are accounted for as they occur.
Although
the fair value of employee stock options is determined in accordance with FASB guidance, changes in the assumptions can materially
affect the estimated value and therefore the amount of compensation expense recognized in the consolidated financial statements.
In
management’s opinion, the existing valuation models may not provide an accurate measure of the fair value of employee stock
options because the option-pricing model value may not be indicative of the fair value that would be established in a willing
buyer/willing seller market transaction.
Income
taxes – We account for income taxes in accordance with ASC 740, Income Taxes , which prescribe the use of the
asset and liability method, whereby deferred tax asset or liability account balances are calculated at the balance sheet date
using current tax laws and rates in effect. Valuation allowances are established when necessary to reduce deferred tax assets
when it is more likely than not that a portion or all of the deferred tax assets will not be realized. ASC 740 guidance also prescribes
a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken
or expected to be taken in a tax return. For benefits to be recognized, a tax position must be more-likely-than-not sustainable
upon examination by taxing authorities. We file a U.S. federal income tax return as well as various state and foreign income tax
returns. Our judgments regarding future taxable income may change over time due to changes in market conditions, changes in tax
laws, tax planning strategies or other factors. If our assumptions, and consequently the estimates, change in the future with
respect to our own deferred tax assets and liabilities, the valuation allowance may be increased or decreased, which may have
a material impact on our consolidated financial statements. We
recognize accrued interest and penalties related to unrecognized tax benefits, if any, as income tax expense, however, no amounts
were accrued for the payment of interest and penalties as of December 31, 2020 and 2019.
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Principles
of consolidation – Our consolidated financial statements include the accounts of our wholly owned and majority-owned
subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial
statements are presented in accordance with accounting principles generally accepted in the U.S. and with the accounting and reporting
requirements of SEC Regulation S-X.
Results
of Operations
Comparison
of Years Ended December 31, 2020 and 2019
Revenues
The
following table shows our revenues for the years ended December 31, 2020 and 2019 (amounts in thousands except percentages).
Year Ended December 31,
$ Increase/
% Increase/
2020
2019
(Decrease)
(Decrease)
Grant revenues
$ 1,053
$ 2,037
$ (984 )
(48 %)
Royalties from product sales and license fees
773
1,221
(448 )
(37 %)
Sale of research products and services
-
257
(257 )
(100 %)
Total revenues
1,826
3,515
(1,689 )
(48 %)
Cost of sales
(385 )
(412 )
(27 )
(7 %)
Gross profit
$ 1,441
$ 3,103
$ (1,662 )
(54 %)
Total
revenues for the year ended December 31, 2020 were $1.8 million compared to $3.5 million for the year ended December 31, 2019.
The decrease of $1.7 million is primarily due to a $1.0 million decrease in grant revenue,
a $0.4 million decrease in royalties from product sales and license fees and a $0.3 million decrease in the sale of research products
and services due to the cessation of such sales .
Grant
revenues are generated primarily by our subsidiary Cell Cure Neurosciences Ltd (“Cell Cure”) from the Israel Innovation
Authority (“IIA”) for the development of OpRegen® and our bio retina program, and from a Small Business
Innovation Research grant from the National Institutes of Health for our vision restoration program (the “NIH grant”).
The decreases in our grant revenues for the year ended December 31, 2020 as compared to the year ended December 31, 2019, were
primarily due to less grant-related activities. Grant revenues generated by Cell Cure from the IIA for the development of OpRegen
and our bio retina program (commencing in 2020) amounted to $0.7 million and $1.4 million for the years ended December
31, 2020 and 2019, respectively, and grant revenues generated by the NIH grant amounted to $0.4 million and $0.6 million for the
years ended December 31, 2020 and 2019, respectively.
Royalties
from product sales and license fees are generated from non-exclusive license agreements with multiple third parties. A majority
of our royalties from product sales and license fees for the year ended December 31, 2020 are related to technologies that were
acquired in the Asterias Merger. The decrease of $0.4 million for the year ended December 31, 2020 compared to the year ended
December 31, 2019 was primarily related to the impact from a $0.6 million upfront, non-refundable payment for a new license agreement
with a third party for the use of certain patents related to the culture of undifferentiated pluripotent stem cells in suspension
that was recorded in 2019.
Operating
Expenses
The
following table shows our operating expenses for the years ended December 31, 2020 and 2019 (amounts in thousands, except percentages).
Year Ended December 31,
$
%
2020
2019
Decrease
Decrease
Research and development expenses
$ 12,317
$ 17,948
$ (5,631 )
(31 %)
General and administrative expenses
15,571 (1)
24,031 (2)
(8,460 )
(35 %)
(1)
Includes
$0.7 million of acquisition related costs for the Asterias Merger.
(2)
Includes
$5.1 million of acquisition related costs for the Asterias Merger.
60
Research
and development expenses
Research
and development expenses consist of costs incurred for company-sponsored, collaborative and contracted research and development
activities. These costs include direct and research-related overhead expenses including compensation and related benefits, stock-based
compensation, consulting fees, research and laboratory fees, rent of research facilities, amortization of intangible assets, and
license fees paid to third parties to acquire patents or licenses to use patents and other technology. We expense research and
development costs as incurred. Research and development expenses incurred and reimbursed by grants from third parties approximate
the grant income recognized in the consolidated statements of operations.
The
following table shows the amount of our total research and development expenses allocated to our primary research and development
projects for the periods presented (amounts in thousands, except percentages).
Year
Ended December 31,
(unaudited)
Amount
Percent of Total
Program
2020
2019
2020
2019
OpRegen ®
and other ophthalmic applications
$ 5,569
$ 12,069
45 %
67 %
OPC1
3,958
4,488
32 %
25 %
VAC platform
2,472
322
20 %
2 %
Renevia and all other
318
1,069
3 %
6 %
Total research and development expenses
$ 12,317
$ 17,948
100 %
100 %
Research
and development expenses for the year ended December 31, 2020 were $12.3 million as compared to $17.9 million for the year
ended December 31, 2019. The decrease of $5.6
million is mainly attributable to the following:
●
a
decrease of $6.5 million in OpRegen and other ophthalmic application expenses, attributable primarily to a decrease in manufacturing
activities in 2020 as compared to 2019,
●
a
decrease of $0.5 million in OPC1 related expenses, primarily related to return of unspent project funds of approximately
$0.8 million from a former Asterias service provider,
●
a
decrease of $0.8 million in Renevia and other related expenses as Renevia received a CE Mark in September 2019 and we are
spending less on research activities as we are actively looking for a commercialization partner in Europe, offset by
●
an
increase of $2.2 million in VAC program expenses, primarily related to the accrual of the signature fee of £1.25 million
($1.6 million) to Cancer Research UK.
General
and administrative expenses
General
and administrative expenses include employee and director compensation allocated to general and administrative expenses, consulting
fees other than those paid for science-related consulting, facilities and equipment rent and maintenance related expenses, insurance
costs allocated to general and administrative expenses, costs of patent applications, prosecution and maintenance, stock
exchange-related costs, depreciation expense, marketing costs, board fees, legal and accounting costs, and other miscellaneous
expenses which are allocated to general and administrative expense.
General
and administrative expenses for the year ended December 31, 2020 were $15.6 million as compared to $24.0 million for the year
ended December 31, 2019. The total net decrease
of $8.4 million was primarily attributable to a $5.5 million reduction in Asterias Merger related expenses, a $2.1 million reduction
in compensation costs as a result of headcount reductions in 2019, a $0.9 million reduction in accounting expenses, a $0.5
million reduction in rent and utilities, a $0.3 million reduction in travel expenses, a $0.3 million reduction in office and information
technology related expenses and a $0.2 million reduction in consulting expenses, offset by a $0.9 million increase related to
the cessation of shared services reimbursements and a $0.5 million increase in legal and patent expenses.
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Other
income and expenses, net
The
following table shows the amount of other income, net, during the year ended December 31, 2020 and 2019 (in thousands):
Year Ended December 31,
2020
2019
Other income, net
Interest income, net
$ 1,039
$ 1,685
Gain on sale of marketable equity securities
4,560
2,421
Unrealized loss on marketable equity securities
(3,782 )
(2,898 )
Gain on sale of equity method investment in OncoCyte
-
546
Unrealized gain on equity method investment in OncoCyte at fair value
-
8,001
Unrealized gain on equity method investment in Asterias at fair value
-
6,744
Unrealized (loss) gain on warrant liability
(174 )
611
Other income, net
2,880
2,532
Total other income, net
$ 4,523
$ 19,642
Interest
income and expense, net – During the years ended December 31, 2020 and 2019, we earned $1.0 million and $1.5 million
of interest income, respectively, from our promissory note with Juvenescence Limited (“Juvenescence”).
Gain
on equity method investment in Asterias – Prior to the closing of the Asterias Merger on March 8, 2019, we owned 21.7
million shares of common stock of Asterias, which we accounted for at fair value using the equity method of accounting. The fair
value of our Asterias shares was approximately $20.2 million as of March 8, 2019, the closing date of the Asterias Merger, based
on $0.93 per share, which was calculated by multiplying: (i) $1.31, the closing price of our common shares on such date; by (ii)
the merger exchange ratio of 0.71. The fair value of our Asterias shares was approximately $13.5 million as of December 31, 2018,
based on the closing price of Asterias common stock of $0.62 per share on such date. Accordingly, we recorded an unrealized gain
of $6.7 million for the year ended December 31, 2019, representing the change in fair value of Asterias common stock from December
31, 2018 to March 8, 2019.
Gain
(loss) on investment in OncoCyte – Prior to September 11, 2019, we elected to account for our shares of OncoCyte common
stock at fair value using the equity method of accounting. We sold 2.25 million shares of OncoCyte common stock for net proceeds
of $4.2 million in July 2019. Accordingly, our ownership in OncoCyte was reduced from 28% to 24%. We sold an additional 4.0 million
shares of OncoCyte common stock for net proceeds of $6.5 million on September 11, 2019. Our ownership in OncoCyte was further
reduced to 16% at this time. Effective September 11, 2019, we began accounting for our shares of OncoCyte common stock as marketable
equity securities.
As
of December 31, 2019, we had 8.4 million shares of OncoCyte common stock. These shares had a fair value of $19.0 million, based
on the closing price of OncoCyte common stock of $2.25 per share on December 31, 2019.
As
of December 31, 2020, we owned 3.6 million shares of OncoCyte common stock. These shares had a fair value of $8.7 million, based
on the closing price of OncoCyte common stock of $2.39 per share on December 31, 2020,
For
the year ended December 31, 2020, we recorded a realized gain of $3.1 million due to sales of OncoCyte shares in the period. In
the same period, we also recorded an unrealized loss of $2.5 million related to our 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, which is offset by $1.2 million related to the shares remaining at December 31,
2020 and the increase in OncoCyte’s stock price from $2.25 at December 31, 2019 to $2.39 at December 31, 2020. For the year
ended December 31, 2019, we recorded a realized gain of $0.5 million due to sales of OncoCyte shares in the period. We
also recorded an unrealized gain of $8.8 million due to the increase in OncoCyte’s stock price from $1.38 per share at December
31, 2018 to $2.25 per share at December 31, 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 $0.8 million was recorded as an unrealized gain
on marketable equity securities.
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All
share prices are determined based on the closing price of OncoCyte common stock on the NYSE American on the applicable dates,
or the last day of trading of the applicable quarter, if the last day of a quarter fell on a weekend.
We
expect our other income and expenses, net, to continue to fluctuate each reporting period based on the changes in the market price
of our OncoCyte shares, which could significantly impact our net income or loss reported in our condensed consolidated statements
of operations for each period.
Marketable
equity securities – We account for the shares we held in Hadasit Bio-Holdings (“HBL”) and AgeX as marketable
equity securities, carried at fair market value on our consolidated balance sheets.
For
the year ended December 31, 2020, we recorded realized gains of $0.8 million and $0.6 million due to sales of AgeX shares and
HBL shares, respectively, in the period.
For
the year ended December 31, 2020, we recorded unrealized losses of $1.3 million related to our AgeX shares. $0.5 million of the
unrealized loss was related to the difference between the book cost basis of AgeX shares sold in the period versus the applicable
prior month’s ending AgeX share price and an additional $0.8 million was related to mark to mark adjustments throughout
the year on the remaining shares of AgeX at each applicable period.
Other
income and expenses, net – Other income and expenses, net, in 2020 and 2019 consist primarily of net foreign currency
transaction gains and losses recognized by Cell Cure and ESI, and changes in the fair value of the Cell Cure liability classified
warrants. Foreign currency transaction gains and losses for the periods presented are principally related to the remeasurement
of the U.S. dollar denominated notes payable by Cell Cure to Lineage.
Income
Taxes
The
market value of the shares of OncoCyte common stock we hold creates a deferred tax liability (the “OncoCyte DTL”)
based on the closing prices of the shares, less our tax basis in the shares. The OncoCyte DTL is a source of future taxable income
to us, as prescribed by ASC 740-10-30-17, that will more likely than not result in the realization of our deferred tax assets
to the extent of the OncoCyte DTL. The OncoCyte DTL is determined based on the closing prices of the OncoCyte shares as of December
31, 2020. Due to the inherent unpredictability of future prices of those shares, we cannot reliably estimate or project the OncoCyte
DTL on an annual basis. Therefore, the OncoCyte DTL is determined based on the actual closing prices on the last stock market
trading day of the applicable accounting period, and the related impacts to the valuation allowance and deferred tax asset changes,
and are recorded in the accounting period in which they occur.
In
connection with the Asterias Merger, a deferred tax liability of $10.8 million (the “Asterias DTL”) was recorded as
part of the acquisition accounting (see Note 3). The Asterias DTL is related to fair value adjustments for the assets and liabilities
acquired in the Asterias Merger, principally consisting of IPR&D. This estimate of deferred taxes was determined based on
the excess of the estimated fair values of the acquired assets and liabilities over the tax basis of the assets and liabilities
acquired. The statutory tax rate was applied, as appropriate, to the adjustment based on the jurisdiction in which the adjustment
is expected to occur. Because the IPR&D (prior to completion or abandonment of the R&D) is considered an indefinite-lived
asset for accounting purposes, the fair value of the IPR&D on the acquisition date creates a deferred income tax liability
in accordance with ASC 740. The Asterias DTL is computed using the fair value of the IPR&D assets on the acquisition date
multiplied by Lineage’s respective federal and state income tax rates. While the Asterias DTL would reverse on impairment
or sale or commencement of amortization of the related intangible assets, those events are not anticipated under ASC 740 for purposes
of predicting reversal of a temporary difference to support the realization of deferred tax assets, except for certain deferred
tax assets and credit carryforwards that are also indefinite in nature as of the Asterias Merger date, which may be considered
for reversal under ASC 740 as further discussed below.
A
valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized.
Lineage established a full valuation allowance as of December 31, 2018 due to the uncertainty of realizing future tax benefits
from its net operating loss carryforwards and other deferred tax assets, including foreign net operating losses generated by its
subsidiaries. During the year ended December 31, 2019, a portion of the valuation allowance was released as it relates to Lineage’s
indefinite lived assets that can be used against the indefinite lived liabilities. The amount of the valuation allowance released
was $7.4 million; as new indefinite lived deferred tax assets are generated, we will continue to book provision benefits until
the deferred tax liability position is exhausted, barring any new developments.
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For
the year ended December 31, 2020, Lineage recorded a $1.2 million deferred tax benefit for income taxes.
We
expect that deferred income tax expense or benefit we record each reporting period, if any, will vary depending on the change
in the closing stock prices of OncoCyte shares from period to period and the related changes in those deferred tax liabilities
and our deferred tax assets and other credits, including changes in the valuation allowance, for each period.
See
Note 3 to our consolidated financial statements included elsewhere in this Report for a description of the Asterias Merger that
was completed on March 8, 2019. We have concluded that an ownership change did occur after the Asterias Merger, and the acquired
operating loss carryforwards are subject to limitation under Section 382 of the Internal Revenue Service Code; Lineage will only
be able to utilize $52.8 million of these operating loss carryforwards.
Liquidity
and Capital Resources
At
December 31, 2020, we had $41.6 million of cash, cash equivalents and marketable equity securities on hand, which includes our
investments in OncoCyte and HBL. We may use our marketable equity securities for liquidity, as necessary, and as market conditions
allow. The market value may not represent the amount that could be realized in a sale of investment shares due to various market
and regulatory factors, including trading volume or market depth factors and volume and manner of sale restrictions under Federal
securities laws, prevailing market conditions and prices at the time of any sale, and subsequent sales of securities by the entities.
In addition, the value of our marketable equity securities may be significantly and adversely impacted by deteriorating global
economic conditions and the recent disruptions to and volatility in the credit and financial markets in the United States and
worldwide resulting from the ongoing COVID-19 pandemic.
Since
inception, we have incurred significant operating losses and have funded our operations primarily through the issuance of equity
securities, the sale of common stock of our former subsidiaries, AgeX and OncoCyte, payments from research grants, royalties from
product sales and sales of research products and services. At December 31, 2020, we had an accumulated deficit of approximately
$294.1 million, working capital of $36.2 million and shareholders’ equity of $95.1 million. We evaluated the projected cash
flows for Lineage and our subsidiaries, and we believe that our $41.6 million in cash, cash equivalents and marketable equity
securities at December 31, 2020, provide sufficient cash, cash equivalents, and liquidity to carry out our current planned operations
through at least twelve months from the issuance date of our consolidated financial statements included elsewhere in this Report.
If we need near term working capital or liquidity to supplement our cash and cash equivalents for our operations, we may sell
some, or all, of our investments, as necessary.
On
March 8, 2019, the Asterias Merger closed and Asterias became our wholly owned subsidiary. We began consolidating Asterias’
operations and results with our operations and results beginning on March 8, 2019. As we integrated Asterias’ operations
into our own, we made extensive reductions in headcount and reduced non-clinical related spend, in each case, as compared to Asterias’
operations before the merger. We implemented significant cost savings initiatives and achieved reduced operational spend in 2020
compared to prior periods.
Our
projected cash flows are subject to various risks and uncertainties, and the unavailability or inadequacy of financing to meet
future capital needs could force us to modify, curtail, delay, or suspend some or all aspects of our current planned operations.
Our determination as to when we will seek new financing and the amount of financing that we will need will be based on our evaluation
of the progress we make in our research and development programs, any changes to the scope and focus of those programs, any changes
in grant funding for certain of those programs, and projection of future costs, revenues, and rates of expenditure. Our ability
to raise additional funds may be adversely impacted by deteriorating global economic conditions and the disruptions to and volatility
in the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic. We may be
required to delay, postpone, or cancel our clinical trials or limit the number of clinical trial sites, unless we are able to
obtain adequate financing. We cannot assure that adequate financing will be available on favorable terms, if at all. Sales of
additional equity securities by us or our subsidiaries and affiliates could result in the dilution of the interests of our current
shareholders.
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Cash
used in operating activities
Net
cash used in operating activities of $19.8 million for the year ended December 31, 2020 primarily reflects the loss from operations
of $26.4 million adjusted for the changes in assets and liabilities of $1.3 million. These items were offset primarily
by non-cash expenses of $2.2 million for stock-based compensation and $2.1 million of depreciation and amortization. The unrealized
gains on equity method investments and marketable securities, foreign currency remeasurement and deferred tax benefit are non-cash
items that had no effect on cash flows.
Net
cash used in operating activities of $31.9 million for the year ended December 31, 2019 primarily reflects the loss from operations
of $38.9 million adjusted for the changes in assets and liabilities of $2.1 million. These items were offset primarily by non-cash
expenses of $3.6 million for stock-based compensation and $3.1 million of depreciation and amortization. The unrealized gains
on equity method investments and marketable securities, foreign currency remeasurement and deferred tax benefit are non-cash items
that had no effect on cash flows.
Cash
used in investing activities
Cash
provided by investing activities of $13.0 million for the year ended December 31, 2020 was associated primarily with receipts
of $10.9 million from sales of a portion of our OncoCyte holdings, $1.3 million in sales of our AgeX holdings and $0.8 million
in sales of a portion of our HBL holdings.
Cash
provided by investing activities of $17.0 million for the year ended December 31, 2019 was associated primarily with receipts
of $10.7 million from sales of a portion of our OncoCyte holdings, $1.7 million in sales of a portion of our AgeX holdings and
$1.7 million in sales of a portion of our HBL holdings as well as the receipt of $3.1 million of cash that Asterias had on the
closing date of the Asterias Merger, offset by $0.4 million in purchases of equipment and other assets.
Cash
provided by financing activities
Cash
provided by financing activities of $29.9 million for the year ended December 31, 2020 was associated primarily with proceeds
of $24.6 million from payment of the Juvenescence promissory note, gross proceeds of $5.1 million from sales of our common
shares in at-the-market transactions under our Controlled Equity Offering SM Sales Agreement with Cantor Fitzgerald
& Co (which excludes $0.3 million of cash in transit related to 2020
sales that settled in 2021), and proceeds of $0.5 million from a Paycheck Protection Program (“PPP”) loan under the Coronavirus
Aid, Relief, and Economic Security Act, all offset by $0.4 million in financing costs.
Cash
provided by financing activities of $0.6 million for the year ended December 31, 2019 was associated primarily with $0.8 million
in landlord reimbursements for tenant improvements, offset by $0.1 million in common shares received and retired for employee
taxes paid.
Off-Balance
Sheet Arrangements
As
of December 31, 2020, we did not have any off-balance sheet arrangements, as defined under the rules of the Securities and Exchange
Commission.
ITEM
7A.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Under
rules and regulations of the Securities and Exchange Commission, as a smaller reporting company, we are not required to provide
the information required by this item.
65