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, 2022, 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, 2022 as compared to the year ended December 31, 2021. 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 We are a clinical-stage biotechnology company developing novel cell therapies to address unmet medical needs. Our programs are based on our proprietary cell-based technology platform and associated development and manufacturing capabilities. From this platform, we design, develop, manufacture, and test specialized human cells with anatomical and physiological functions similar to, or identical to, cells found naturally in the human body. Cells which we manufacture are created by specific developmental biological differentiation protocols that we apply to established, well-characterized, and self-renewing pluripotent cell lines. These cells are transplanted into patients and are designed to (a) replace or support cells that are absent or dysfunctional due to degenerative disease, aging, or traumatic injury, and (b) restore or augment functional activity in the affected person. Our strategy is to efficiently leverage our technology platform and our development, formulation, delivery, and manufacturing capabilities to advance our programs internally, or in conjunction with strategic partners, to further enhance their value and probability of success. As one example, in December 2021 we entered into a Collaboration and License Agreement with F. Hoffmann-La Roche Ltd and Genentech, Inc., a member of the Roche Group, wherein we granted to Roche exclusive worldwide rights to develop and commercialize retinal pigment epithelium cell therapies, including our proprietary cell therapy program known as OpRegen ® , for the treatment of ocular disorders, including geographic atrophy (GA) secondary to age-related macular degeneration (AMD). Under the terms of the Roche Agreement, Lineage received a $50.0 million upfront payment and is eligible to receive up to $620.0 million in certain developmental, regulatory, and commercialization milestone payments. Lineage also is eligible to receive tiered double-digit percentage royalties on net sales of OpRegen in the U.S. and other major markets. See Note 14 (Commitments and Contingencies) to our consolidated financial statements included elsewhere in this Report for discussion on the Roche Agreement. As of December 31, 2022, we have five allogeneic, or “off-the-shelf,” cell therapy programs in development, of which three have reached clinical testing: Product Candidates ● OpRegen ® , an allogeneic retinal pigment epithelium cell replacement therapy currently in a Phase 2a multicenter clinical trial, being conducted by Genentech, for the treatment of geographic atrophy (GA) secondary to age-related macular degeneration (AMD), also known as atrophic or dry AMD. A previous Phase 1/2a trial conducted by Lineage enrolled twenty-four (24) individuals with dry AMD with GA. In December 2021, this program was partnered with Roche for further clinical development and commercialization. ● OPC1 , an allogeneic oligodendrocyte progenitor cell therapy currently in long-term follow-up from a Phase 1/2a multicenter clinical trial for cervical spinal cord injuries. To date, five (5) patients with thoracic spinal cord injuries and twenty-five (25) patients with cervical spinal cord injuries have been enrolled in clinical trials of OPC1. The clinical development of OPC1 has been partially funded by $14.3 million received under a grant from the California Institute for Regenerative Medicine. Additional clinical trials are being planned. 78 | P a g e ● VAC , an allogeneic cancer immunotherapy comprised of antigen-presenting dendritic cells. One of the VAC product candidates, VAC2, is currently in a Phase 1 clinical trial in non-small cell lung cancer. This clinical trial is being funded and conducted by Cancer Research UK, one of the world’s largest independent cancer research charities. An additional VAC-based product candidate is in preclinical development with our partner, Immunomic Therapeutics, Inc., for the treatment of glioblastoma multiforme. ● ANP1 , an allogeneic auditory neuron progenitor cell transplant currently in preclinical development for the treatment of debilitating hearing loss. ● PNC1, an allogeneic photoreceptor cell transplant currently in preclinical development for the treatment of vision loss due to photoreceptor dysfunction or damage. Other Programs We have additional undisclosed product candidates being considered for development, which cover a range of therapeutic areas and unmet medical needs. Generally, these product candidates are based on the same platform technology and employ a similar guided cell differentiation and transplant approach as the product candidates detailed above, but in some cases may also include genetic modifications designed to enhance efficacy and/or safety profiles. In addition to seeking to create value for shareholders by developing product candidates and advancing those candidates through clinical development, we also may seek to create value from our large patent estate and additional related technologies and capabilities, through partnering and/or strategic transactions. 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 (Significant Accounting Policies) 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. 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. 79 | P a g e 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. 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. 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. 80 | P a g e 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. 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 U.S. Treasury notes with maturities similar to the expected term of the awards. Forfeitures are accounted for as they occur. For restricted stock unit awards (“RSUs”) subject to service and/or performance vesting conditions, the grant-date fair value is established based on the closing price of Lineage’s common shares on such date. Stock-based compensation expense for RSUs subject to only service conditions is recognized on a straight-line basis over the service period. Stock-based compensation expense for RSUs with both service and performance conditions is recognized on a graded basis only if it is probable that the performance condition will be achieved. Lineage accounts for forfeitures of RSUs as they occur in determining stock-based compensation expense. For RSUs subject to a market condition, the grant-date fair value is estimated using a Monte Carlo valuation model. The model is based on random projections of stock price paths and must be repeated numerous times to achieve a probabilistic assessment. Lineage recognizes stock-based compensation expense for RSUs subject to market-based vesting conditions regardless of whether it becomes probable that the vesting conditions will be achieved, and stock-based compensation expense for such RSUs is not reversed if vesting does not actually occur. 81 | P a g e 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. Results of Operations Comparison of Years Ended December 31, 2022 and 2021 Revenues The following table shows our revenues for the years ended December 31, 2022 and 2021 (amounts in thousands except percentages). Year Ended December 31, $ Increase/ % Increase/ 2022 2021 (Decrease) (Decrease) Collaboration revenues $ 13,367 $ 1,120 $ 12,247 1,093 % Royalties 1,336 2,776 (1,440 ) (52 )% Grant revenues - 445 (445 ) (100 )% Total revenues 14,703 4,341 10,362 238 % Cost of sales 728 1,426 (698 ) (49 )% Gross profit $ 13,975 $ 2,915 $ 11,060 379 % Total revenues for the year ended December 31, 2022 were $14.7 million compared to $4.3 million for the year ended December 31, 2021. The $10.4 million increase was primarily due to a $12.2 million increase in collaboration revenues related to the current year recognition of the $50.0 million upfront payment under the Roche Agreement, which was included in deferred revenues at December 31, 2021 (see Note 3 (Revenue) to our consolidated financial statements included in this report for additional information) , offset by a $1.4 million decrease in royalties which were significantly higher in the prior year resulting from the recording of royalty revenues of approximately $1.8 million from a certain customer during the prior year based on the customers updated communication to us regarding royalties due, and a $0.4 million decrease in grant revenues due to less grant-related activities during the year. Grant revenues are generated primarily by our subsidiary Cell Cure from the IIA for the development of OpRegen and our bio retina program. The decrease in our grant revenues for the year ended December 31, 2022 as compared to the year ended December 31, 2021, were primarily due to less grant-related activities. Operating Expenses Our operating expenses consist of research and development expenses and general and administrative expenses. Research and development expenses . These 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 expenses that 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 our consolidated statements of operations. Royalties and sublicensing fees are recorded as research and development expenses, unless they are associated with royalties from product sales, which we classify as cost of sales in our consolidated statements of operations. 82 | P a g e General and administrative expenses . These expenses include employee and director compensation and related benefits, including stock-based compensation, for executive and corporate personnel, professional and consulting fees, and allocated overhead such as facilities rent and equipment rent and maintenance, 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. The following table shows our operating expenses for the years ended December 31, 2022 and 2021 (amounts in thousands, except percentages). Year Ended December 31, $ Increase/ % Increase/ 2022 2021 (Decrease) (Decrease) Research and development expenses $ 13,987 $ 33,914 $ (19,927 ) (59 )% General and administrative expenses 22,508 18,212 4,296 24 % Research and development expenses . The $19.9 million year-over-year decrease in research and development expense is primarily the result of $21.0 million of royalty and redemption fee expense recorded in 2021 for payments owed to Hadasit and the IIA pursuant to financial obligations to each of them in connection with the $50.0 million upfront payment we received from Roche in January 2022 under the Roche Agreement and for which there was no similar expense in 2022 (see Note 14 (Commitments and Contingencies) to our consolidated financial statements included in this report). General and administrative expenses . The $4.3 million year-over-year increase in general and administrative expenses was primarily attributable to (i) a $2.1 million increase in legal and litigation expense, (ii) a $1.3 million increase in employee salaries and benefits, (iii) a $0.9 million increase in stock-based compensation related expenses (see Note 12 (Stock Based-Awards) to our consolidated financial statements included in this report for additional information), (iv) a $0.4 million increase for audit and tax services, (v) a $0.2 million increase in insurance costs, (vi) a $0.2 million increase in consulting expenses, (vii) a $0.1 million increase in recruiting and hiring fees, (viii) a $0.1 million increase in travel expenses, (ix) a $0.6 million decrease in patent related costs and (x) a $0.5 million decrease in investor relations expenses. 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, Amount Percent of Total Program 2022 2021 2022 2021 OpRegen ® $ 5,043 $ 25,507 36 % 75 % OPC1 5,039 6,145 36 % 18 % VAC platform 2,582 2,178 19 % 6 % ANP1 741 - 5 % - % PNC1 458 - 3 % - % All other programs 124 84 1 % 1 % Total research and development expenses $ 13,987 $ 33,914 100 % 100 % Research and development expenses . For the year ended December 31, 2022, the $19.9 million decrease in total research and development expenses is mainly attributable to: (i) a $20.5 million net decrease in expenses related to our OpRegen program, attributable to last year’s payment of $21.0 million for royalty and redemption fee expenses paid to Hadasit and the IIA, respectively; (ii) a $1.1 million net decrease in expenses related to our OPC1 program, primarily related to a decrease in manufacturing activities for the program; (iii) a $0.4 million increase in expense related to our VAC program, primarily related to manufacturing improvement activities; (iv) a $0.7 million increase in expenses related to our ANP1 program, primarily related to manufacturing activities for our allogeneic auditory neuron cell transplant program; and (v) a $0.5 million increase in expenses related to our PNC1 program, primarily related to research and development activities for our allogeneic photoreceptor cell transplant program. 83 | P a g e Other Income and Expenses, Net The following table shows the amount of other income (expenses), net, during the year ended December 31, 2022 and 2021 (in thousands): Year Ended December 31, 2022 2021 Other income (expenses), net Interest income, net $ 829 $ 2 Gain on sale of marketable equity securities - 6,024 Gain on extinguishment of debt - 523 Unrealized loss on marketable equity securities (2,194 ) (2,299 ) Gain on revaluation of warrant liability 225 205 Other income (expenses), net (2,152 ) 1,486 Total other income (expenses), net $ (3,292 ) $ 5,941 Marketable debt securities . During the third quarter of 2022, we began to invest our excess cash in short-term U.S. Treasury securities resulting in an increase in interest income. See Note 4 (Marketable Debt Securities) to our consolidated financial statements included in this report for additional information regarding our marketable debt securities. Marketable equity securities . We expect our total other income (expenses), net, to fluctuate each reporting period based on the changes in the market price of the common stock of OncoCyte Corporation (“OncoCyte”), which could impact our net income or loss reported in our consolidated statements of operations for a particular reporting period. We also account for the shares we hold in Hadasit Bio-Holdings as marketable equity securities. These shares are carried at fair market value on our consolidated balance sheets. The accounting transactions for these shares were not material for either of the years ended December 31, 2022 and 2021. See Note 5 (Marketable Equity Securities) to our consolidated financial statements included in this report for additional information regarding our marketable equity securities. Gain on extinguishment of debt. For the year ended December 31, 2021, Lineage recognized a gain of $0.5 million on extinguishment of debt in connection with the forgiveness in full of the loan it obtained under the Paycheck Protection Program. Other income and (expenses), net . Other expenses, net, for each of the years ended December 31, 2022 and 2021 consisted primarily of net foreign currency transaction gains and losses recognized by our subsidiaries Cell Cure and ES Cell International Pte. Ltd. Foreign currency transaction gains and losses for the periods presented are principally related to the remeasurement of the U.S. dollar denominated notes payable and notes receivable between Cell Cure and Lineage. Income Taxes Under ASC 740, Income Taxes , a valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. We established a full valuation allowance as of December 31, 2018 due to the uncertainty of realizing future tax benefits from the net operating loss carryforwards and other deferred tax assets, including foreign net operating losses generated by its subsidiaries. For the year ended December 31, 2022, Lineage recorded a withholding tax for $0.5 million on interest expense deemed paid to Lineage from Cell Cure, related to the purchase of intellectual property pursuant to the US Israeli tax treaty. For the years ended December 31, 2022, and 2021, Lineage did not record a deferred tax benefit. See Note 13 (Income Taxes) for additional information. 84 | P a g e Liquidity and Capital Resources Sources of Liquidity We have historically funded our operations primarily through proceeds from the sale of shares of our common stock, the sale of common stock of our former subsidiaries, research grants, revenues from collaborations, and royalties from product sales that are unrelated to our current cell therapy product candidates. During 2022, we funded our operations primarily through (a) the $50.0 million upfront payment received under the Roche Agreement, (b) $1.6 million of proceeds from the exercise of warrants and employee stock options, and (c) $1.3 million in royalties received. During 2022, we did not raise any proceeds from research grants, sales of our common stock or from sales of common stock of our former subsidiaries. As of December 31, 2022, $63.8 million remained available for sale under our at the market offering program and we owned marketable equity securities with a fair value of $0.4 million based on the closing price of such securities on that date. See Note 5 (Marketable Equity Securities) and Note 11 (Shareholders’ Equity) to our consolidated financial statements included in this report for additional information regarding the marketable equity securities we own and our at the market offering program, respectively. We may sell shares of our common stock and the marketable securities we own for liquidity. However, when we can effect such sales and the amount of shares we can sell depends on a variety of factors to be determined by us from time to time, including, among others, market conditions, the trading price and volume of our common stock and of the marketable securities we own. The market value of our marketable equity securities may not represent the amount that could be realized in a sale of such securities due to various market factors, including 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 pandemics, including the COVID-19 pandemic, geopolitical conflicts, rising inflation and interest rates, and other macroeconomic factors. Cash Flows Cash provided by (used in) operating activities Net cash provided by operating activities was $1.1 million for the year ended December 31, 2022, which primarily reflects the net changes in assets and liabilities of $18.7 million, plus the $5.0 million in non-cash expenses for stock-based compensation and depreciation and amortization, less the loss from operations of $22.5 million. The change in assets and liabilities was impacted by the receipt of the $50.0 million upfront payment under the Roche Agreement, and subsequent related payments to the IIA and Hadasit (see Note 14 (Commitments and Contingencies) to the consolidated financial statements included in this report for further explanation), partially offset by the accrual of the litigation settlement also as described in Note 14 (Commitments and Contingencies). The unrealized loss on marketable equity securities and foreign currency remeasurement had no effect on the cash flows. 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. Cash provided by (used in) investing activities Cash used in investing activities for the year ended December 31, 2022 was $46.2 million and consisted of $53.4 million related to the purchase of U.S. Treasury securities and $0.4 million for the purchase of equipment, offset with $7.7 million in U.S. Treasuries which matured during the year. 85 | P a g e 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 financing activities Cash provided by financing activities for the year ended December 31, 2022 was $1.6 million and consisted of $1.0 million of proceeds from the exercise of warrants to purchase shares of Cell Cure and $0.6 million of proceeds from the exercise of employee stock options. 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. Financial Obligations Our financial obligations primarily consist of obligations to our licensors under our in-license agreements, obligations related to grants received from government entities, including the IIA, obligations under vendor contracts to provide research services and other purchase commitments with suppliers. The obligations under our in-license agreements require us to make future payments relating to sublicense fees, milestone fees, royalties and reimbursement of patent maintenance costs. Sublicense fees are payable to licensors when we sublicense underlying intellectual property to third parties and are based on a percentage of the license fees we receive from sublicensees. Milestone fees, including those related to the Roche Agreement, are due to licensors upon future achievement of certain commercial, development and regulatory milestones. Royalties, including those related to royalties we may receive under the Roche Agreement, are payable to licensors based on a percentage of net sales of licensed products. Reimbursement of patent maintenance costs are payable to licensors as reimbursement for the cost of maintaining license patents. Due to the contingent nature of these payments, the amounts may fluctuate significantly from period to period. As of December 31, 2022, we have not included any financial obligations under our in-license agreements in our consolidated balance sheet because the achievement and timing of the events that would require the payment of such financial obligations is not fixed and determinable. As discussed in “Part I—Item 1. Business—Grants from Government Entities,” above, we have received grants under the Innovation Law and are required to pay royalties to the IIA from the revenues generated from the sale of product candidates and related services developed, in whole or in part pursuant to, or as a result of, a research and development program funded by the IIA. Under the Innovation Law, we are also required to pay redemption fees to the IIA. To date, through a series of separate grants beginning in 2007, Cell Cure has received a total of $15.4 million from the IIA to support the OpRegen program. We are obligated to pay approximately 24.3% of any future payments received under the Roche Agreement to the IIA, up to an aggregate cap on all payments to IIA, such cap growing over time via interest accrual until paid in full, which currently stands at approximately $91.2 million. Redemption fees due to the IIA under the Innovation Law are due upon receipt of any milestone and royalties received under the Roche Agreement. As of December 31, 2022, we have not included any future financial obligations due to the IIA under the Innovation Law in our consolidated balance sheet because the achievement and timing of the events that would require future payments to the IIA under the Innovation Law is not fixed and determinable. See Note 14 (Commitments and Contingencies) to our consolidated financial statements included in this report for additional information. Under the terms of the leases for the facilities from which Cell Cure and Lineage operate, a total of $4.3 million of rent payments will become due, of which $1.1 million will become due in 2023. In the normal course of business, we enter into services agreements with contract research organizations, contract manufacturing organizations and other third parties. Generally, these agreements provide for termination upon notice, with specified amounts due upon termination based on the timing of termination and the terms of the agreement. The amounts and timing of payments under these agreements are uncertain and contingent upon the initiation and completion of the services to be provided. 86 | P a g e Future Funding Requirements At December 31, 2022, we had an accumulated deficit of approximately $363.4 million. We expect to continue to incur losses for at least the next several years. We expect that our operating expenses will continue to increase for the foreseeable future as we continue the development of, and seek regulatory approval for, our product candidates. As a result, we will need significant additional capital to fund our operations. Our determination as to when we will seek additional capital and the amount of additional capital that we will need will be based on our evaluation of the progress we make in our research and development programs, changes to the scope and focus of those programs, changes in grant funding for certain of those programs, and projection of future costs, revenues, and rates of expenditure. If we are unable to raise additional capital when and as needed, we may be required to delay, postpone, or cancel our clinical trials or limit the number of clinical trial sites. We may seek to obtain the additional capital we may need through one or more equity offerings, debt financings or other third-party funding, including potential strategic alliances and licensing or collaboration agreements. We cannot assure that adequate additional capital will be available on favorable terms, if at all. The issuance of additional securities, whether equity or debt, or the possibility of such issuance, may cause the market price of our common shares to decline, and the issuance of additional equity securities could result in the dilution of the interests of our current shareholders. If we obtain additional capital through strategic alliances and licensing or collaboration agreements, we may be required to relinquish rights to our intellectual property, our product candidates or otherwise agree to terms unfavorable to us. The unavailability or inadequacy of additional capital to meet future capital needs could force us to modify, curtail, delay, or suspend some or all aspects of our current planned operations. Our ability to raise additional capital 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 pandemics, including the COVID-19 pandemic, the conflict in Ukraine, rising inflation and interest rates, and other macroeconomic factors. We believe that our $57.9 million in cash, cash equivalents and marketable securities at December 31, 2022, provide sufficient liquidity to carry out our current planned operations (including after taking into account the amount we contributed to the settlement of the litigation discussed in Note 14 (Commitments and Contingencies) to the consolidated financial statements included in this report), through at least twelve months from the issuance date of our consolidated financial statements included elsewhere in this report. We believe we will meet our longer-term expected future cash requirements and obligations with our current cash and cash equivalents, milestone and other payments we expect to receive under our collaboration agreements, and proceeds we receive from sales under our at the market offering program. 87 | P a g e ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Under rules and regulations of the SEC, as a smaller reporting company, we are not required to provide the information required by this item. 88 | P a g e