Lineage Cell Therapeutics, Inc. 10-K

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, 2021, 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, 2021 as compared to the year ended December 31, 2020. 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.” Company and Business Overview Lineage Cell Therapeutics, Inc. (“Lineage,” “we,” “us,” or “our”) is a clinical-stage biotechnology company developing novel cell therapies to address unmet medical needs. Our programs are based on our proprietary cell-based technology and associated development and manufacturing capabilities. From this platform, we design, develop, and manufacture specialized human cells with anatomical and physiological functions which are similar or identical to cells found naturally in the human body. These cells which we manufacture are created by developmental differentiation protocols applied to established and well-characterized, pluripotent, and self-renewing cell lines. These functional cells are transplanted into patients to either 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 or infectious diseases. Our strategy is to efficiently leverage our technology platform and manufacturing capabilities to develop and advance our programs internally or in conjunction with strategic partners to further enhance their value. As one example, on December 17, 2021, we entered into a Collaboration and License Agreement with F. Hoffmann-La Roche Ltd and Genentech, Inc., a member of the Roche Group (collectively, “Roche”), wherein Lineage granted to Roche exclusive worldwide rights to develop and commercialize retinal pigment epithelium cell therapies, including its proprietary cell therapy known as OpRegen®, for the treatment of ocular disorders, including advanced dry age-related macular degeneration with geographic atrophy. Roche has paid Lineage a $50.0 million upfront payment under this alliance 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. Currently, Lineage is working with Roche in support of the dry age-related macular degeneration (OpRegen) program and is clinically testing therapies to treat spinal cord injuries and non-small cell lung cancer, as well as conducting research and preclinical development activities intended to advance our pipeline into other therapeutic indications and target tissues or organs. Product Candidates & Other Programs We have several allogeneic, or “off-the-shelf,” cell therapy programs in 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. As of December 17, 2021 this program has been partnered with Roche for further clinical development and commercialization. ● OPC1 , an oligodendrocyte progenitor cell therapy currently in long-term follow-up for a Phase 1/2a multicenter clinical trial for spinal cord injuries (“SCI”). This clinical trial has been partially funded by the California Institute for Regenerative Medicine (“CIRM”). ● VAC , an allogeneic cancer immunotherapy 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, one of the world’s largest independent cancer research charities. We also have another VAC-based product candidate in preclinical development with our partner, Immunomic Therapeutics, Inc. (“ITI”), for the treatment of glioblastoma multiforme (“GBM”). ● Other. We have other product candidates in preclinical development covering a range of therapeutic areas and target tissues or organs. Generally, these candidates are based on the same pluripotent platform technology and employ a similar guided cell differentiation and transplant approach as our current clinical-stage products. 68 | P a g e 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 as of December 31, 2021. During the year ended December 31, 2021, we received approximately $10.1 million in gross proceeds in connection with our sale of shares of OncoCyte. 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. Critical Accounting Estimates 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. 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 tested for impairment in accordance with Accounting Standards Update (“ASU”) 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment . In-process research and development (“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’s estimated life as a finite-lived intangible asset or be impaired, respectively, in accordance with ASC 350, Intangibles – Goodwill and Other (“ASC 350”). 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 and finance 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 and finance lease ROU assets 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 operating lease payments is recognized on a straight-line basis over the lease term. Lease expense for finance lease payments is recognized as amortization of ROU assets and related interest. Operating and finance 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. 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. 69 | P a g e Going concern assessment – In accordance with Accounting Standards Update 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. As part of the accounting treatment for these contracts, 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. 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 may be 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. 70 | P a g e To identify the performance obligations within the collaboration agreements, we first identify all the promises in the contract (i.e., explicit and implicit), which may include a customer option to acquire additional goods or services for free or at a discount. We exclude any immaterial promises from the assessment of identifying performance obligations. When an option is identified as providing a customer with a material right, the option is identified as a performance obligation. A portion of the transaction price is then allocated to the option and recognized when (or as) the future goods or services related to the option are provided or when the option expires. As part of the accounting treatment for these agreements, 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. 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. 71 | P a g e 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. Research and development costs which have an alternative future use will be capitalized as tangible assets, and costs with no future benefit or alternative use will be expensed 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. Royalty expenses or sublicensing fees are recorded as research and development costs, unless these costs are associated with royalties from product sales, which we classify as cost of sales on our consolidated statements of operations. We estimate preclinical, clinical, and other research related expenses based on services performed, pursuant to arrangements with contract research organizations, that conduct studies and research on our behalf. We estimate these expenses based on regular reviews with internal management personnel and external service providers as to the progress or stage of completion of services and the contracted fees to be paid for such services. Based upon the combined inputs of internal and external resources, if the actual timing of the performance of services or the level of effort varies from the original estimates, we will adjust the accrual accordingly. 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, 2021 and 2020. 72 | P a g e 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, 2021 and 2020 Revenues The following table shows our revenues for the years ended December 31, 2021 and 2020 (amounts in thousands except percentages). Year Ended December 31, $ Increase/ % Increase/ 2021 2020 (Decrease) (Decrease) Royalties $ 2,776 $ 773 $ 2,003 259 % Collaboration revenues 1,120 - 1,120 100 % Grant revenues 445 1,053 (608 ) (58 )% Total revenues 4,341 1,826 2,515 138 % Cost of sales (1,426 ) (385 ) (1,041 ) 270 % Gross profit $ 2,915 $ 1,441 $ 1,474 102 % Total revenues for the year ended December 31, 2021 were $4.3 million compared to $1.8 million for the year ended December 31, 2020. The increase of $2.5 million is primarily due to a $2.0 million increase in royalties, a $1.1 million increase in collaboration revenues from our collaboration agreements with Roche and ITI, offset by a $0.6 million decrease in grant revenues due to less grant-related activities during the year. Our royalties are derived from product sales and license fees. For the year ended December 31, 2021 royalties were $2.0 million higher compared to 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 50% of these additional royalties in cost of sales during the year. 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 previously 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, 2021 as compared to the year ended December 31, 2020, 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 amounted to $0.4 million and $0.7 million for the years ended December 31, 2021 and 2020, respectively, and grant revenues generated by the NIH Grant amounted to $0.4 million for the year ended December 31, 2020. 73 | P a g e Operating Expenses The following table shows our operating expenses for the years ended December 31, 2021 and 2020 (amounts in thousands, except percentages). Year Ended December 31, $ % 2021 2020 Increase Increase Research and development expenses $ 33,914 (1) $ 12,317 $ 21,597 175 % General and administrative expenses 18,212 15,571 2,641 17 % (1) Includes $21.0 million of royalty and redemption fee expense to Hadasit Medical Research and Development Ltd. (“Hadasit”) and the IIA, respectively, pursuant to Lineage’s financial obligations related to the Roche Agreement (see Note 14), in connection with the receipt of the $50.0 million upfront payment received from Roche . 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. Research and development costs which have an alternative future use will be capitalized as tangible assets, and costs with no future benefit or alternative use will be expensed 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. Royalty expenses or sublicensing fees are recorded as research and development costs, unless these costs are associated with royalties from product sales, which we classify as cost of sales on our 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 2021 2020 2021 2020 OpRegen ® and other ophthalmic applications $ 25,507 $ 5,569 75 % 45 % OPC1 6,145 3,958 18 % 32 % VAC platform 2,178 2,472 6 % 20 % All other programs 84 318 1 % 3 % Total research and development expenses $ 33,914 $ 12,317 100 % 100 % Research and development expenses for the year ended December 31, 2021 were $33.9 million as compared to $12.3 million for the year ended December 31, 2020. The increase of $21.6 million is mainly attributable to the following: ● an increase of $19.9 million in OpRegen, attributable primarily to a $12.1 million redemption fee to the IIA and a royalty expense of $8.9 million to Hadasit, related to Lineage’s financial obligations related to the Roche Agreement (see Note 14), in connection with receipt of the $50.0 million upfront payment received from Roche. ● an increase of $2.2 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 from a former Asterias service provider, ● a net decrease of $0.3 million in the 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, substantially offset with increased manufacturing activities in the current year, as well as activities to support the ITI collaboration agreement, and ● a net decrease of $0.2 million in Renevia and related expenses due to a reduction in research activities. 74 | P a g e 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, 2021 were $18.2 million as compared to $15.6 million for the year ended December 31, 2020. The total net increase of $2.6 million was primarily attributable to a $0.9 million increase in share-based compensation expense, a $0.7 million increase in litigation and other expenses related to Lineage’s merger with Asterias, a $0.6 million increase in legal and patent expenses, a $0.3 million increase in payroll and related benefits, a $0.3 million increase in investor relations expenses, a $0.2 million increase in consulting expense, partially offset with a $0.4 million reduction in rent and utilities. Other income and expenses, net The following table shows the amount of other income, net, during the year ended December 31, 2021 and 2020 (in thousands): Year Ended December 31, 2021 2020 Other income, net Interest income, net $ 2 $ 1,039 Gain on sale of marketable equity securities 6,024 4,560 Gain on extinguishment of debt 523 - Unrealized loss on marketable equity securities (2,299 ) (3,782 ) Unrealized gain (loss) on warrant liability 205 (174 ) Other income, net 1,486 2,880 Total other income, net $ 5,941 $ 4,523 Interest income and expense, net - During the year ended December 31, 2020, we earned $1.0 million of interest income from our promissory note with Juvenescence. Marketable equity securities - As of December 31, 2021, Lineage owned 1.1 million shares of OncoCyte common stock. These shares had a fair value of $2.4 million, based on the closing price of OncoCyte common stock of $2.17 per share on December 31, 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 year ended December 31, 2021, Lineage recorded a realized gain of $6.0 million due to sales of OncoCyte shares in the year. Lineage recorded a net unrealized loss on marketable equity securities of $2.2 million related to changes in fair market value of OncoCyte’s common stock price during the year. For the year ended December 31, 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 $2.5 million related to changes in fair market value of OncoCyte’s common stock price during the year. 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. 75 | P a g e We account for the shares we hold in Hadasit Bio-Holdings Ltd (“HBL”) as marketable equity securities as of December 31, 2021. These securities were carried at fair market value on our consolidated balance sheets, and the accounting transactions for the year ended December 31, 2021, were not material. For the year ended December 31, 2021, we did not hold any marketable securities related to AgeX. For the year ended December 31, 2020, Lineage 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, due to changes in fair market value of AgeX’s common stock price during the period. Gain on extinguishment of debt – For the year ended December 31, 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 income, net – Other income, net, in 2021 and 2020 consist primarily of net foreign currency transaction gains recognized by Cell Cure and ESI, and changes in the fair value of the Cell Cure liability classified warrants. Foreign currency transaction gains 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 December 31, 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 December 31, 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, as of December 31, 2021. 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 year ended December 31, 2021, Lineage did not record a tax provision or deferred tax benefit. 76 | P a g e 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. Liquidity and Capital Resources At December 31, 2021, we had $58.4 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, 2021, we had an accumulated deficit of approximately $337.1 million, working capital of $64.4 million and shareholders’ equity of $90.9 million. We evaluated the projected cash flows for Lineage and our subsidiaries, and we believe that our $58.4 million in cash, cash equivalents and marketable equity securities at December 31, 2021, 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. We believe we will meet the longer-term expected future cash requirements and obligations, through our current cash and cash equivalents, milestone and other payments under our collaborative agreements, and our available capacity on the At-the-Market (“ATM”) program (see Note 11). We may, in the future, sell marketable securities, including additional equity, to fund additional working capital, capital expenditures, or for other general purposes. Our cash flows are dependent on a number of factors in addition to our operational results, including our contractual obligations. We are obligated to make the following material rent payments under the terms of our operating leases at our Cell Cure facilities. We have three leases which aggregate to 1,796 rentable square meters (approximately 19,328 square feet) of office and laboratory space in Jerusalem, Israel, the leases all expire in December 2025. Total remaining rent payments due are $2.4 million, of which $0.5 million is due in 2022. See Note 14, for additional details on our contractual obligations. In January 2022, Lineage received a $50.0 million upfront payment related to the Roche Agreement. Lineage made a subsequent payment of $12.1 million to the IIA, pursuant to Lineage’s obligations under the Innovation Law. Additionally, Lineage made a subsequent payment of $8.9 million to Hadasit, pursuant to Lineage’s obligations under the Second Amended and Restated License Agreement. See Note 14 for a description of the Roche Agreement and related payment obligations. 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. 77 | P a g e 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 used in operating activities Net cash used in operating activities of $23.6 million for the year ended December 31, 2021 primarily reflects the loss from operations of $49.2 million adjusted for the changes in assets and liabilities of $21.1 million. These items were offset primarily by non-cash expenses of $3.5 million for stock-based compensation and $0.9 million of depreciation and amortization. The unrealized loss on marketable securities, and foreign currency remeasurement are non-cash items that had no effect on cash flows. 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 loss on 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 $9.7 million for the year ended December 31, 2021 was associated primarily with receipts of $10.1 million from sales of a portion of our OncoCyte holdings, offset with the purchase of equipment for $0.4 million. 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 financing activities Cash provided by financing activities of $36.9 million for the year ended December 31, 2021 was associated primarily with proceeds net of financing costs of $29.8 million from the sale of common shares in at-the-market offerings under our Controlled Equity Offering SM Sales Agreement with Cantor Fitzgerald & Co. and proceeds of $7.2 million from the exercise of employee stock options. 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 (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 PPP loan under the Coronavirus Aid, Relief, and Economic Security Act, all offset by $0.4 million in financing costs. 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. 78 | P a g e