Lineage Cell Therapeutics, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The matters addressed in this Item 2 that are not historical information constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) including statements about any of the following: any projections of earnings, revenue, gross profit, cash, effective tax rate, use of net operating losses, or any other financial items; the plans, strategies and objectives of management for future operations or prospects for achieving such plans; and any statements of assumptions underlying any of the foregoing. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” and similar expressions are intended to identify forward-looking statements. While Lineage may elect to update forward-looking statements in the future, it specifically disclaims any obligation to do so, even if Lineage’s estimates change, and readers should not rely on those forward-looking statements as representing Lineage’s views as of any date subsequent to the date of the filing of this Report. Although we believe that the expectations reflected in these forward-looking statements are reasonable, such statements are inherently subject to risks and Lineage can give no assurances that its expectations will prove to be correct. Actual results could differ materially from those described in this Report because of numerous factors, many of which are beyond the control of Lineage. A number of important factors could cause the results of the Company to differ materially from those indicated by such forward-looking statements, including those detailed in Part II, Item IA, “Risk Factors” of this Report. The following discussion should be read in conjunction with Lineage condensed consolidated interim financial statements and the related notes provided under “Item 1 - Financial Statements” above. Company and Business Overview 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, Lineage is testing therapies to treat dry age-related macular degeneration, spinal cord injuries, and non-small cell lung cancer. Our programs are based on our proprietary cell-based technology 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 transplanted into a patient either to replace or support cells that are dysfunctional or absent due to degenerative disease or traumatic injury or are administered as a means of helping the body mount a more robust and effective immune response to cancer. We have three allogeneic, or “off-the-shelf,” cell therapy programs in clinical development: ● OpRegen ® , a retinal pigment epithelium (“RPE”) cell replacement therapy currently in a Phase 1/2a multicenter clinical trial for the treatment of advanced dry age-related macular degeneration (“AMD”) with geographic atrophy (“GA”) (also known as atrophic AMD). There are currently 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 one of the leading causes 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 subacute spinal cord injuries (“SCI”). This clinical trial has been partially funded by the California Institute for Regenerative Medicine (“CIRM”). ● 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, one of the world’s largest independent cancer research charities. In addition to seeking to create value for shareholders by developing product candidates and other technologies through our clinical development programs, we also seek to create value from our technologies through partnering and strategic transactions. We founded two companies that later became publicly traded companies: OncoCyte Corporation (“OncoCyte”) and AgeX Therapeutics, Inc. (“AgeX”). We continue to hold common stock in OncoCyte. Though our principal focus is on advancing our three cell therapy programs currently in clinical development, we may seek to create additional value by initiating new programs using existing protocols or new protocols and cell lines, or through corporate transactions, as we have in the past. 29 Critical Accounting Policies This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses and analyzes data in our unaudited Condensed Consolidated Interim Financial Statements, which we have prepared in accordance with generally accepted accounting principles in the United States. Preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of our board of directors. Actual conditions may differ from our assumptions and actual results may differ from our estimates. An accounting policy is deemed critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements. Management believes that there have been no significant changes to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the Securities and Exchange Commission (the “Commission”) on March 11, 2021, except as follows: 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 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 condensed consolidated balance sheet. ROU assets represent our right to use an underlying asset during the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Operating leases are included as ROU assets in property and equipment, and ROU lease liabilities, current and long-term, in the condensed consolidated balance sheets. Financing leases are included in property and equipment, and in financing lease liabilities, current and long-term, in the condensed consolidated balance sheets. 30 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. Revenue Recognition Lineage recognizes revenue in accordance with Financial Accounting Standards Board (“FASB”) ASU 2014-09 , Revenues from Contracts with Customers (Topic 606) , and in a manner that depicts the transfer of control of a product or a service to a customer and reflects the amount of the consideration it is entitled to receive in exchange for such product or service. In doing so, Lineage follows a five-step approach: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations; and (v) recognize revenue when (or as) the customer obtains control of the product or service. Lineage considers the terms of a contract and all relevant facts and circumstances when applying the revenue recognition standard. Lineage applies the revenue recognition standard, including the use of any practical expedients, consistently to contracts with similar characteristics and in similar circumstances. In applying the provisions of ASU 2014-09, Lineage has determined that government grants are out of the scope of ASU 2014-09 because the government entities do not meet the definition of a “customer,” as defined by ASU 2014-09, as there is not considered to be a transfer of control of goods or services to the government entities funding the grant. In the absence of applicable guidance under U.S. GAAP, the Company’s policy is to recognize grant revenue when the related costs are incurred and the right to payment is realized. Costs incurred are recorded in research and development and general and administrative expenses on the accompanying statements of operations (see Note 15) . Royalties from product sales and license fees: For agreements that include sales-based royalties, including commercial milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, Lineage recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). Lineage estimates and recognizes royalty revenues based on all available information, including estimates provided by the customer or licensee from which Lineage obtains such estimates directly for each reporting period. Actual revenues ultimately received may differ from those estimates recorded and are adjusted in the period when information to actuals is available to Lineage. Collaborative Agreements We review collaborative agreements to determine if the accounting treatment falls under Accounting Standards Codification, Topic 606 , Revenue from Contracts with Customers (“ASC 606”) , or Accounting Standards Codification Topic 808, Collaborative Arrangements (“ASC 808”). While these agreements are typically within the scope of ASC 808, we may analogize to ASC 606 for some aspects of the agreements. The terms of our collaborative agreements typically include one or more of the following: (i) upfront fees; (ii) milestone payments related to achievement of development or commercial goals; (iii) royalties on net sales of licensed products; and (iv) reimbursement of cost-sharing of R&D expenses. Each of these payments eventually result in collaboration revenues. When a portion of non-refundable upfront fees or other payments received are allocated to continuing performance obligations under the terms of a collaborative arrangement, they are recorded as deferred revenue and recognized as collaboration revenue when (or as) the underlying performance obligation is satisfied. As part of the accounting treatment for these arrangements, we must develop estimates and assumptions that require judgement to determine the underlying stand-alone selling price for each performance obligation which determines how the transaction price is allocated among the performance obligations. The following items are estimated in the calculation of the stand-alone selling price: forecasted revenues and development costs, development timelines, discount rates and probabilities of technical and regulatory success. We evaluate each performance obligation to determine if they can be satisfied at a point in time or over time, and we measure the services delivered to our collaboration partners each reporting period, which is based on the progress of the related program. If necessary, we adjust the measure of performance and related revenue recognition. Any such adjustments are recorded on a cumulative catch-up basis which would affect revenue and net income (loss) in the period of adjustment. In addition, variable consideration (e.g., milestone payments) must be evaluated to determine if it is constrained and, therefore, excluded from the transaction price. Upfront Fees: If a license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize collaboration revenues from the transaction price allocated to the license when the license is transferred to the licensee, and the licensee is able to use and benefit from the license. When the license is determined to be non-distinct, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time, and, if over time, the appropriate method of measuring progress for purposes of recognizing collaboration revenue from the allocated transaction price. For example, when we receive upfront fees for the performance of research and development services, or when research and development services are not considered to be distinct from a license, we recognize collaboration revenue for those units of account over time using a measure of progress. We evaluate the measure of progress at each reporting period and, if necessary, adjust the measure of performance and related revenue as a change in estimate. 31 Milestone Payments: At the inception of each collaboration agreement that includes milestone payments (variable consideration), we evaluate whether the milestones are considered probable of being reached and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our or the collaboration partner’s control, such as non-operational developmental and regulatory approvals, are generally not considered probable of being achieved until those approvals are received. At the end of each reporting period, we re-evaluate the probability of achievement of milestones that are within our or the collaboration partner’s control, such as operational developmental milestones and any related constraint, and if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect collaboration revenues and net income (loss) in the period of adjustment. Revisions to our estimate of the transaction price may also result in negative collaboration revenues and net income (loss) in the period of adjustment. Royalties: For collaboration agreements that include sales-based royalties, including commercial milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). Reimbursement, cost-sharing payments: Under certain collaborative agreements, we will receive reimbursement for a portion of our R&D expenses. Such reimbursements are reviewed for gross versus net reporting considerations and reflected either as a reduction of R&D expense or as reimbursement revenue in our condensed consolidated statements of operations. Results of Operations Comparison of Three and Nine Months Ended September 30, 2021 and 2020 Revenues and Cost of Sales The amounts in the tables below show our consolidated revenues, by source, and cost of sales for the periods presented (in thousands). Three Months Ended September 30, (unaudited) $ Increase/ % Increase/ 2021 2020 (Decrease) (Decrease) Royalties $ 1,909 $ 342 $ 1,567 458 % Grant revenues 68 229 (161 ) (70 )% Collaboration revenues 293 - 293 100 % Total revenues 2,270 571 1,699 298 % Cost of sales (985 ) (102 ) (883 ) 866 % Gross profit $ 1,285 $ 469 $ 816 174 % Nine Months Ended September 30, (unaudited) $ Increase/ % Increase/ 2021 2020 (Decrease) (Decrease) Royalties $ 2,430 $ 607 $ 1,823 300 % Grant revenues 237 864 (627 ) (73 )% Collaboration revenues 506 - 506 100 % Total revenues 3,173 1,471 1,702 116 % Cost of sales (1,222 ) (271 ) (951 ) 351 % Gross profit $ 1,951 $ 1,200 $ 751 63 % Our total revenues increased by $1.7 million for the three months ended September 30, 2021 as compared to the same period in the prior year, due to a $1.6 million increase in royalties, a $0.3 million increase in collaboration revenues related to the Immunomic Therapeutics, Inc. (“ITI”) collaborative agreement, offset by a $0.2 million decrease in grant revenues due to less grant-related activities during the period. Our total revenues increased by $1.7 million for the nine months ended September 30, 2021 as compared to the same period in the prior year, due to a $1.8 million increase in royalties and a $0.5 million increase in collaboration revenues related to the ITI collaborative agreement, offset by a $0.6 million decrease in grant revenues due to less grant-related activities during the period. 32 Our royalties are derived from product sales and license fees. For the three months and nine months ended September 30, 2021 royalties were significantly higher compared to the same periods in the prior year, primarily due to additional royalty revenues of $1.8 million from a certain royalty customer, based on the customer’s updated communication to us regarding royalties due. Consequently, Lineage also recorded a corresponding 50% of these additional royalties in cost of sales, as an accrued royalty payable to a separate royalty party. As of September 30, 2021, the $1.8 million is included as a receivable within prepaid expenses and other current assets. The customer paid these royalties to us in October 2021. Our grant revenues are generated primarily by our subsidiary Cell Cure Neurosciences Ltd. (“Cell Cure”) from the Israel Innovation Authority (“IIA”) for the development of OpRegen and 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”). Grant revenues generated by Cell Cure from the IIA for the development of OpRegen and our bio retina program amounted to $68,000 and $237,000 for the three and nine months ended September 30, 2021 and $216,000 and $477,000 for the three and nine months ended September 30, 2020, respectively. Grant revenues generated by the NIH grant were $13,000 and $387,000 for the three and nine months ended September 30, 2020. NIH grant related activities were completed in the third quarter of 2020. Operating expenses The amounts in the tables below are our consolidated operating expenses for the periods presented (in thousands). Three Months Ended September 30, (unaudited) $ Increase/ % Increase/ 2021 2020 (Decrease) (Decrease) Research and development expenses $ 2,811 $ 3,566 $ (755 ) (21 )% General and administrative expenses 5,317 3,628 1,689 47 % Nine Months Ended September 30, (unaudited) $ Increase/ % Increase/ 2021 2020 (Decrease) (Decrease) Research and development expenses $ 9,136 $ 9,710 $ (574 ) (6 )% General and administrative expenses 13,788 12,055 1,733 14 % Research and development expenses Research and development expenses consist of costs incurred for company-sponsored, collaborative and contracted research and development activities. These costs include direct and research-related overhead expenses including compensation and related benefits, stock-based compensation, consulting fees, research and laboratory fees, rent of research facilities, amortization of intangible assets, and license fees paid to third parties to acquire patents or licenses to use patents and other technology. We expense research and development costs as incurred. Research and development expenses incurred and reimbursed by grants from third parties approximate the grant income recognized in the consolidated statements of operations. The following table shows the amount of our total research and development expenses allocated to our primary research and development projects for the periods presented (in thousands). Three Months Ended September 30, (unaudited) Amount Percent of Total Program 2021 2020 2021 2020 OpRegen ® $ 777 $ 1,066 28 % 30 % OPC1 1,514 576 54 % 16 % VAC platform 490 1,871 17 % 52 % All other programs 30 53 1 % 2 % Total research and development expenses $ 2,811 $ 3,566 100 % 100 % 33 Nine Months Ended September 30, (unaudited) Amount Percent of Total Program 2021 2020 2021 2020 OpRegen ® $ 2,909 $ 4,323 32 % 45 % OPC1 4,637 2,947 51 % 30 % VAC platform 1,499 2,167 16 % 22 % All other programs 91 273 1 % 3 % Total research and development expenses $ 9,136 $ 9,710 100 % 100 % The net decrease of $0.8 million in total research and development expenses for the three months ended September 30, 2021 as compared to the same period in the prior year is mainly attributable to the following: ● a net decrease of $0.3 million in OpRegen, attributable primarily to a decrease in manufacturing activities in 2021 as compared to 2020, ● an increase of $0.9 million in OPC1-related expenses, primarily driven by a return of unspent project funds of approximately $0.8 million in the prior year period from a former Asterias service provider, and ● a net decrease of $1.4 million in VAC program expenses, primarily driven by the prior year signature fee accrual of $1.6 million to Cancer Research UK related to our license agreement, partially offset by increased manufacturing activities and support of the ITI collaborative agreement. The net decrease of $0.6 million in total research and development expenses for the nine months ended September 30, 2021 as compared to the same period in the prior year is mainly attributable to the following: ● a net decrease of $1.4 million in OpRegen, attributable primarily to a decrease in manufacturing activities in 2021 as compared to 2020, ● an increase of $1.7 million in OPC1-related expenses, primarily related to an increase in manufacturing and development activities for this program, and a return of unspent project funds of approximately $0.8 million in the prior year period from a former Asterias service provider, ● a net decrease of $0.7 million in VAC program expenses, primarily driven by the prior year signature fee accrual of $1.6 million to Cancer Research UK related to our license agreement, partially offset with. increased manufacturing activities and support of the ITI collaborative agreement, and ● a net decrease of $0.2 million in Renevia and related expenses due to a reduction in research activities. General and administrative expenses General and administrative expenses include employee and director compensation, consulting fees other than those paid for science-related consulting, facilities and equipment rent and maintenance related expenses, insurance costs allocated to general and administrative expenses, costs of patent applications, prosecution and maintenance, stock exchange-related costs, depreciation expense, marketing costs, legal and accounting costs, and other miscellaneous expenses which are allocated to general and administrative expense. The total net increase of $1.7 million in general and administrative expenses for the three months ended September 30, 2021 compared to the same period in 2020, was primarily attributable to a $0.8 million increase in litigation and other expenses related to Lineage’s merger with Asterias and a $0.5 million increase in share-based compensation expense. The total net increase of $1.7 million in general and administrative expenses for the nine months ended September 30, 2021 compared to the same period in 2020, was primarily attributable to a $0.7 million increase in litigation and other expenses related to Lineage’s merger with Asterias, a $0.6 million increase in share-based compensation expense and a $0.4 million increase in investor relations expenses. 34 Other income and (expenses), net The following table shows the amount of other income and (expense), net, for the periods presented (in thousands): Three Months Ended September 30, (unaudited) 2021 2020 Other income (expenses), net Interest income, net $ 1 $ 252 Gain on sale of marketable equity securities - 120 Unrealized loss on marketable equity securities (2,450 ) (2,003 ) Unrealized gain on warrant liability 53 55 Other income, net 393 351 Total other expenses, net $ (2,003 ) $ (1,225 ) Nine Months Ended September 30, (unaudited) 2021 2020 Other income (expenses), net Interest income (expenses), net $ (1 ) $ 1,037 Gain on sale of marketable equity securities 6,024 3,848 Gain on extinguishment of debt 523 - Unrealized loss on marketable equity securities (621 ) (7,487 ) Unrealized gain on warrant liability 105 84 Other income (expenses), net (318 ) 175 Total other income (expenses), net $ 5,712 $ (2,343 ) Interest income, net – During the three and nine months ended September 30, 2020 we earned $0.3 million and $1.0 million of interest income, respectively. In August 2020, Lineage received $24.6 million from Juvenescence, representing the outstanding principal and accrued interest on the promissory note. Marketable equity securities - As of September 30, 2021, Lineage owned 1.1 million shares of OncoCyte common stock. These shares had a fair value of $4.0 million, based on the closing price of OncoCyte common stock of $3.56 per share on September 30, 2021. As of December 31, 2020, Lineage 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 three months ended September 30, 2021, Lineage recorded a net unrealized loss on marketable equity securities of $2.5 million related to changes in fair market value of OncoCyte’s common stock price during the quarter. For the three months ended September 30, 2020, Lineage recorded an unrealized loss of $1.9 million due to sales of OncoCyte shares in the period. For the nine months ended September 30, 2021, Lineage recorded a realized gain of $6.0 million due to sales of OncoCyte shares in the period. Lineage recorded a net unrealized loss on marketable equity securities of $0.6 million related to changes in fair market value of OncoCyte’s common stock price during the quarter. For the nine months ended September 30, 2020, Lineage recorded a realized gain of $3.1 million due to sales of OncoCyte shares in the period. Lineage also recorded an unrealized loss on marketable equity securities of $6.1 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 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. We account for the shares we hold in HBL as marketable equity securities as of September 30, 2021. These securities were carried at fair market value on our consolidated balance sheets, and the accounting transactions for the three and nine months ended September 30, 2021 were not material. For the three and nine months ended September 30, 2021, we did not hold any marketable securities related to AgeX. 35 For the three and nine months ended September 30, 2020, Lineage recorded realized gains of $0.1 million and $0.7 million, respectively, due to sales of AgeX shares in the period. For the three and nine months ended September 30, 2020, we recorded unrealized losses of $0.1 million and $1.4 million, respectively, due to changes in fair market value of AgeX’s common stock price during the period. Gain on extinguishment of debt – For the nine months ended September 30, 2021, Lineage recognized a gain of $0.5 million on extinguishment of debt related to the Paycheck Protection Program (PPP) loan from Axos Bank. Lineage applied for forgiveness on the PPP loan on September 30, 2020, and on May 13, 2021, received notice that the PPP loan was forgiven in full. Other expenses, net - Other expenses, net, in 2021 and 2020 consist primarily of net foreign currency transaction gains and losses recognized by our subsidiaries Cell Cure and ES Cell International Pte. Ltd. (“ESI”), changes in the fair value of warrants issued by Cell Cure, dividend income and interest income, net. Foreign currency transaction gains and losses for the periods presented are principally related to the remeasurement of the U.S. dollar denominated notes payable by Cell Cure to Lineage. Income Taxes The market value of the shares of OncoCyte common stock we hold creates a deferred tax liability based on the closing prices of the shares, less our tax basis in the shares. The deferred tax liability generated by the OncoCyte shares that we hold as of September 30, 2021, is a source of future taxable income to us, as prescribed by ASC 740-10-30-17, that will more likely than not result in the realization of our deferred tax assets to the extent of the deferred tax liability. This deferred tax liability is determined based on the closing prices of the OncoCyte shares as of September 30, 2021. Due to the inherent unpredictability of future prices of those shares, we cannot reliably estimate or project those deferred tax liabilities on an annual basis. Therefore, the deferred tax liability pertaining to OncoCyte shares, determined based on the actual closing prices on the last stock market trading day of the applicable accounting period, and the related impacts to the valuation allowance and deferred tax asset changes, are recorded in the accounting period in which they occur. In connection with the Asterias Merger, a deferred tax liability of $10.8 million was recorded as part of the acquisition accounting. The deferred tax liability (“DTL”) is related to fair value adjustments for the assets and liabilities acquired in the Asterias Merger, principally consisting of IPR&D. This estimate of deferred taxes was determined based on the excess of the estimated fair values of the acquired assets and liabilities over the tax basis of the assets and liabilities acquired. The statutory tax rate was applied, as appropriate, to the adjustment based on the jurisdiction in which the adjustment is expected to occur. Because the IPR&D (prior to completion or abandonment of the R&D) is considered an indefinite-lived asset for accounting purposes, the fair value of the IPR&D on the acquisition date creates a deferred income tax liability in accordance with ASC 740. This DTL is computed using the fair value of the IPR&D assets on the acquisition date multiplied by Lineage’s respective federal and state income tax rates. While this DTL would reverse on impairment or sale or commencement of amortization of the related intangible assets, those events are not anticipated under ASC 740 for purposes of predicting reversal of a temporary difference to support the realization of deferred tax assets, except for certain deferred tax assets and credit carryforwards that are also indefinite in nature as of the Asterias Merger date, which may be considered for reversal under ASC 740 as further discussed below. We have concluded that an ownership change did occur after the Asterias Merger, and the acquired net 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 and $41.9 million of their federal and California net operating losses, respectively. 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, 2020, 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 $1.2 million; as new indefinite lived deferred tax assets are generated, we will continue to book provision benefits until the deferred tax liability position is exhausted, barring any new developments. For the three and nine months ended September 30, 2021, Lineage recorded a $1.0 million and $1.2 million deferred tax benefit, respectively, that was primarily related to federal net operating losses generated for the three and nine months ended September 30, 2021, which was available and indefinite in nature. 36 For the three and nine months ended September 30, 2020, Lineage recorded a $0.2 million deferred tax benefit for income taxes. We expect that deferred income tax expense or benefit we record each reporting period, if any, will vary depending on the change in the closing stock prices of OncoCyte shares from period to period and the related changes in those deferred tax liabilities and our deferred tax assets and other credits, including changes in the valuation allowance, for each period. Liquidity and Capital Resources At September 30, 2021, we had $65.1 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 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, OncoCyte and AgeX, payments from research grants, royalties from product sales and sales of research products and services. At September 30, 2021, we had an accumulated deficit of $308.1 million, working capital of $59.6 million and shareholders’ equity of $119.6 million. We evaluated the projected cash flows for Lineage and our subsidiaries, and we believe that our $65.1 million in cash, cash equivalents and marketable equity securities provide sufficient cash, cash equivalents, and liquidity to carry out our current planned operations through at least twelve months from the issuance date of our condensed consolidated interim financial statements included elsewhere in this Report. If we need near term working capital or liquidity to supplement our cash and cash equivalents for our operations, we may sell some, or all, of our investments, as necessary. The COVID-19 pandemic previously impacted patient enrollment in our OpRegen Phase 1/2a multicenter clinical trial and is currently affecting the VAC2 Phase 1 multicenter clinical trial. In particular, we saw sites pause enrollment to focus on, and direct resources to, the COVID-19 pandemic or adhere to national or local guidelines. Additionally, currently enrolled patients may decide not to enroll or continue participating in follow-up visits as part of the ongoing clinical trials, as a result of the pandemic. At this point in time, the majority of our sites are back to normal daily operations. However, we are unable to predict with confidence if there will be future patient enrollment delays or missed study visits as the COVID-19 pandemic continues or gets worse. If patient enrollment or study follow-up is delayed for an extended period of time, our clinical trials could be delayed or otherwise adversely affected. Additionally, an inability to enroll or follow a sufficient number of patients for any of our current or future clinical trials could result in significant delays. Our projected cash flows are subject to various risks and uncertainties, and the unavailability or inadequacy of financing to meet future capital needs could force us to modify, curtail, delay, or suspend some or all aspects of our current planned operations. Our determination as to when we will seek new financing and the amount of financing that we will need will be based on our evaluation of the progress we make in our research and development programs, any changes to the scope and focus of those programs, any changes in grant funding for certain of those programs, and projection of future costs, revenues, and rates of expenditure. Our ability to raise additional funds may be adversely impacted by deteriorating global economic conditions and the disruptions to and volatility in the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic. We may be required to delay, postpone, or cancel our clinical trials or limit the number of clinical trial sites, unless we are able to obtain adequate financing. We cannot assure that adequate financing will be available on favorable terms, if at all. Sales of additional equity securities by us or our subsidiaries and affiliates could result in the dilution of the interests of our current shareholders. Cash flows used in operating activities Net cash used in operating activities of $17.7 million for the nine months ended September 30, 2021 primarily reflects the loss from operations of $21.0 million. These items were offset primarily by non-cash expenses of $2.6 million for stock-based compensation and $0.7 million of depreciation and amortization. The unrealized loss on marketable equity securities and deferred tax benefit had no effect on cash flows. 37 Net cash used in operating activities of $14.1 million for the nine months ended September 30, 2020 primarily reflects the loss from operations of $20.6 million less the changes in assets and liabilities of $2.0 million. These items were offset primarily by non-cash expenses of $1.8 million of depreciation and amortization and $1.7 million for stock-based compensation. The unrealized loss on marketable equity securities and deferred tax benefit had no effect on cash flows. Cash flows provided by investing activities Cash provided by investing activities of $9.9 million for the nine months ended September 30, 2021 was associated primarily with receipts of $10.1 million from sales of a portion of our OncoCyte holdings, offset by purchases of equipment for $0.2 million. Cash provided by investing activities of $12.1 million for the nine months ended September 30, 2020 was associated primarily with receipts of $10.9 million from sales of a portion of our OncoCyte holdings and $1.2 million from sales of a portion of our AgeX holdings. Cash flows provided by financing activities Cash provided by financing activities of $36.0 million for the nine months ended September 30, 2021 was associated primarily with proceeds net of financing costs of $29.8 million from the sale of common shares and proceeds of $6.3 million from the exercise of employee stock options. Cash provided by financing activities of $25.1 million for the nine months ended September 30, 2020 was associated primarily with proceeds of $24.6 million from payment of the Juvenescence promissory note and proceeds of $0.5 million from a Paycheck Protection Program (“PPP”). Off-Balance Sheet Arrangements As of September 30, 2021 and December 31, 2020, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Commission Regulation S-K. Item 3. Quantitative and Qualitative Disclosures about Market Risk Under Commission rules and regulations, as a smaller reporting company, we are not required to provide the information required by this item.