Lineage Cell Therapeutics, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The matters addressed in this Item 2 that are not historical information constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, including statements about any of the following: any projections of earnings, revenue, gross profit, cash, effective tax rate, use of net operating losses, or any other financial items; the plans, strategies and objectives of management for future operations or prospects for achieving such plans; and any statements of assumptions underlying any of the foregoing. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” and similar expressions are intended to identify forward-looking statements. While Lineage may elect to update forward-looking statements in the future, it specifically disclaims any obligation to do so, even if Lineage’s estimates change, and readers should not rely on those forward-looking statements as representing Lineage’s views as of any date subsequent to the date of the filing of this Report. Although we believe that the expectations reflected in these forward-looking statements are reasonable, such statements are inherently subject to risks and Lineage can give no assurances that its expectations will prove to be correct. Actual results could differ materially from those described in this Report because of numerous factors, many of which are beyond the control of Lineage. A number of important factors could cause the results of the Company to differ materially from those indicated by such forward-looking statements, including those detailed in Part II, Item IA, “Risk Factors” of this Report and in Part I, Item 1A, “Risk Factors” in our most recent Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “Commission” ) on March 12, 2020. The following discussion should be read in conjunction with Lineage condensed consolidated interim financial statements and the related notes provided under “Item 1 - Financial Statements” above. Company and Business Overview Lineage is a clinical-stage biotechnology company developing novel cell therapies for unmet medical needs. Our focus is to develop therapies for degenerative retinal diseases, neurological conditions associated with demyelination, and aiding the body in detecting and combating cancer. Specifically, Lineage is testing therapies to treat dry age-related macular degeneration, spinal cord injuries, and non-small cell lung cancer. Lineage’s programs are based on our proprietary cell-based therapy platform and associated development and manufacturing capabilities. From this platform, Lineage develops and manufactures specialized, terminally or partially differentiated human cells from established and well-characterized pluripotent cell lines. These differentiated cells are transplanted into a patient either to replace or support cells that are dysfunctional or absent due to degenerative disease or traumatic injury, or are administered as a means of helping the body mount an effective immune response to cancer. We have three allogeneic, or “off-the-shelf,” cell therapy programs in clinical development: ● OpRegen ® , a retinal pigment epithelium cell replacement therapy currently in a Phase 1/2a multicenter clinical trial for the treatment of advanced dry age-related macular degeneration (“AMD”) with geographic atrophy. There currently are no therapies approved by the U.S. Food and Drug Administration (“FDA”) for dry AMD, which accounts for approximately 85-90% of all AMD cases and is the leading cause of blindness in people over the age of 60. ● OPC1 , an oligodendrocyte progenitor cell therapy currently in a Phase 1/2a multicenter clinical trial for acute spinal cord injuries. This clinical trial has been partially funded by the California Institute for Regenerative Medicine. ● VAC2 , an allogeneic (non-patient-specific or “off-the-shelf”) cancer immunotherapy of antigen-presenting dendritic cells currently in a Phase 1 clinical trial in non-small cell lung cancer. This clinical trial is being funded and conducted by Cancer Research UK, the world’s largest independent cancer research charity. Lineage also is seeking to create value from additional assets, such as from patents or non-clinical candidates, including seeking to identify a commercialization or development partner for Renevia ® . Renevia is a proprietary three-dimensional scaffold designed to support adipose tissue transplants that was granted a Conformité Européenne (“CE”) Mark in September 2019. 34 We completed our merger (the “Asterias Merger”) with Asterias Biotherapeutics, Inc. (“Asterias”) on March 8, 2019, which incorporated OPC1 and VAC2 into our cell therapy product portfolio. In addition to seeking to create value for shareholders by developing product candidates and other technologies through our clinical development programs, we also seek to create value from our technologies through partnering and strategic transactions. We founded two companies that later became publicly traded companies: OncoCyte Corporation (“OncoCyte”) and AgeX Therapeutics, Inc. (“AgeX”). We no longer hold any common stock in AgeX. The value of our OncoCyte holdings as of November 3, 2020, was approximately $5.6 million, based on the closing price of their common stock on that date. In this Report, see Part II, Item 1A, “Risk Factors—Risks Related to Our Business Operations and Capital Requirements—The value of our investments in public companies fluctuates based on their respective stock prices and could be negatively affected by poor business performance.” Though our principal focus is on advancing our three cell therapy programs in clinical development, we may seek to create additional value through corporate transactions, as we have in the past. Our securities holdings also may be a significant source of capital to fund our operations as an alternative to issuing additional Lineage securities. Critical Accounting Policies This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses and analyzes data in our unaudited Condensed Consolidated Interim Financial Statements, which we have prepared in accordance with GAAP. Preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of our board of directors. Actual conditions may differ from our assumptions and actual results may differ from our estimates. An accounting policy is deemed critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements. Management believes that there have been no significant changes to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2019, except as follows: Business Combinations We account for business combinations, such as the Asterias Merger completed in March 2019, in accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations , which requires the purchase price to be measured at fair value. When the purchase consideration consists entirely of our common shares, we calculate the purchase price by determining the fair value, as of the acquisition date, of shares issued in connection with the closing of the acquisition. We recognize estimated fair values of the tangible assets and intangible assets acquired, including in-process research and development (“IPR&D”), and liabilities assumed as of the acquisition date, and we record as goodwill any amount of the fair value of the tangible and intangible assets acquired and liabilities assumed in excess of the purchase price. Goodwill and IPR&D Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed. Goodwill is not amortized but is tested for impairment at least annually, or more frequently if circumstances indicate potential impairment. IPR&D assets are indefinite-lived intangible assets until the completion or abandonment of the associated research and development (“R&D”) efforts. Once the R&D efforts are completed or abandoned, the IPR&D will either be amortized over the asset life as a finite-lived intangible asset or be impaired, respectively, in accordance with ASC 350, Intangibles - Goodwill and Other . In accordance with ASC 350, goodwill and acquired IPR&D are determined to have indefinite lives and, therefore, are not amortized. Instead, they are tested for impairment at least annually and between annual tests if we become aware of an event or a change in circumstances that would indicate the asset may be impaired. 35 Leases We account for leases in accordance with ASC 842, Leases . We determine if an arrangement is a lease at inception. Leases are classified as either financing or operating, with classification affecting the pattern of expense recognition in the consolidated statements of operations. Under the available practical expedients for the adoption of ASC 842, we account for the lease and non-lease components as a single lease component. We recognize right-of-use (“ROU”) assets and lease liabilities for leases with terms greater than twelve months in the condensed consolidated balance sheet. ROU assets represent our right to use an underlying asset during the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term. Operating leases are included as right-of-use assets in property and equipment, and ROU lease liabilities, current and long-term, in the condensed consolidated balance sheets. Financing leases are included in property and equipment, and in financing lease liabilities, current and long-term, in the condensed consolidated balance sheets. Going Concern Assessment In accordance with Accounting Standards Update (“ASU”) 2014-15, Presentation of Financial Statements – Going Concern , we assess going concern uncertainty in our consolidated financial statements to determine if we have sufficient cash and cash equivalents on hand and working capital to operate for a period of at least one year from the date our consolidated financial statements are issued or are available to be issued, which is referred to as the “look-forward period” as defined by ASU No. 2014-15. As part of this assessment, based on conditions that are known and reasonably knowable to us, we will consider various scenarios, forecasts, projections, and estimates, and we will make certain key assumptions, including the timing and nature of projected cash expenditures or programs, and our ability to delay or curtail those expenditures or programs, if necessary, among other factors. Based on this assessment, as necessary or applicable, we make certain assumptions concerning our ability to curtail or delay research and development programs and expenditures to the extent we deem probable those implementations can be achieved and we have the proper authority to execute them within the look-forward period in accordance with ASU 2014-15. Results of Operations Comparison of Three and Nine Months Ended September 30, 2020 and 2019 Revenues and Cost of Sales The amounts in the tables below show our consolidated revenues, by source, and cost of sales for the periods presented (in thousands). Three Months Ended September 30, (unaudited) $ Increase/ % Increase/ 2020 2019 (Decrease) (Decrease) Grant revenue $ 229 $ 350 $ (121 ) (35 )% Royalties from product sales and license fees 342 164 178 109 % Sale of research products and services - 53 (53 ) (100 )% Total revenues 571 567 4 1 % Cost of sales (102 ) (114 ) (12 ) (11 )% Gross profit $ 469 $ 453 $ 16 4 % 36 Nine Months Ended September 30, (unaudited) $ Increase/ % Increase/ 2020 2019 (Decrease) (Decrease) Grant revenue $ 864 $ 1,628 $ (764 ) (47 )% Royalties from product sales and license fees 607 390 217 56 % Sale of research products and services - 256 (256 ) (100 )% Total revenues 1,471 2,274 (803 ) (35 )% Cost of sales (271 ) (289 ) (18 ) (6 )% Gross profit $ 1,200 $ 1,985 $ (785 ) (40 )% Our total revenues increased by $4,000 for the three months ended September 30, 2020 as compared to the same period in the prior year, primarily reflecting a $178,000 increase in royalties from product sales and license fees, offset by a $121,000 decrease in grant revenues due to less grant-related activities and a $53,000 decrease in the sale of research products and services due to the cessation of such sales. Our total revenues decreased by $803,000 for the nine months ended September 30, 2020 as compared to the same period in the prior year, primarily reflecting a $764,000 decrease in grant revenues due to less grant-related activities and a $256,000 decrease in the sale of research products and services due to the cessation of such sales, offset by a $217,000 increase in royalties from product sales and license fees. Our grant revenues are generated primarily by our subsidiary Cell Cure Neurosciences Ltd. (“Cell Cure”) from the Israel Innovation Authority (“IIA”) for the development of OpRegen ® and from a Small Business Innovation Research grant from the National Institutes of Health for our vision restoration program (the “NIH grant”). NIH grant related activities were completed in the third quarter of 2020. Grant revenues generated by Cell Cure from the IIA for the development of OpRegen amounted to $216,000 and $477,000 for the three and nine months ended September 30, 2020 and $277,000 and $1,193,000 for the three and nine months ended September 30, 2019, respectively. Grant revenues generated by the NIH grant amounted to $13,000 and $387,000 for the three and nine months ended September 30, 2020 and $72,000 and $435,000 for the three and nine months ended September 30, 2019, respectively. Royalties from product sales and license fees for the three and nine months ended September 30, 2020 included $200,000 recognized in September 2020 related to the expiration of an option granted by Asterias to Novo Nordisk A/S (“Novo Nordisk”) in September 2018 to license certain intellectual property. This amount was originally recorded as deferred revenue and subsequently recognized as revenue in September 2020, when the option period expired. Operating expenses The amounts in the tables below are our consolidated operating expenses for the periods presented (in thousands). Three Months Ended September 30 (unaudited) $ % 2020 2019 (Decrease) (Decrease) Research and development expenses $ 3,566 $ 4,266 $ (700 ) (16 )% General and administrative expenses 3,628 4,609 (981 ) (21 )% Nine Months Ended September 30 (unaudited) $ % 2020 2019 (Decrease) (Decrease) Research and development expenses $ 9,710 $ 14,462 $ (4,752 ) (33 )% General and administrative expenses 12,055 19,527 (7,472 ) (38 )% 37 Research and development expenses Research and development expenses consist of costs incurred for company-sponsored, collaborative and contracted research and development activities. These costs include direct and research-related overhead expenses including compensation and related benefits, stock-based compensation, consulting fees, research and laboratory fees, rent of research facilities, amortization of intangible assets, and license fees paid to third parties to acquire patents or licenses to use patents and other technology. We expense research and development costs as incurred. Research and development expenses incurred and reimbursed by grants from third parties approximate the grant income recognized in the consolidated statements of operations. The following table shows the amount of our total research and development expenses allocated to our primary research and development projects for the periods presented (in thousands). Three Months Ended September 30, (unaudited) Amount Percent of Total Program 2020 2019 2020 2019 OpRegen ® and other ophthalmic applications $ 1,066 $ 2,564 30 % 60 % OPC1 576 1,425 16 % 34 % VAC platform 1,871 45 52 % 1 % Renevia and all other 53 232 2 % 5 % Total research and development expenses $ 3,566 $ 4,266 100 % 100 % Nine Months Ended September 30, (unaudited) Amount Percent of Total Program 2020 2019 2020 2019 OpRegen ® and other ophthalmic applications $ 4,323 $ 9,304 45 % 64 % OPC1 2,947 3,937 30 % 27 % VAC platform 2,167 286 22 % 2 % Renevia and all other 273 935 3 % 7 % Total research and development expenses $ 9,710 $ 14,462 100 % 100 % The decrease of $0.7 million in total research and development expenses for the three months ended September 30, 2020 as compared to the same period in the prior year is mainly attributable to the following: ● a decrease of $1.5 million in OpRegen and other ophthalmic application expenses, attributable primarily to a decrease in manufacturing activities in 2020 as compared to 2019, ● a decrease of $0.8 million in OPC1 related expenses, primarily related to a return of unspent project funds of approximately $0.8 million from a former Asterias service provider, ● a decrease of $0.2 million in Renevia and other related expenses as Renevia received a CE Mark in September 2019 and we are spending less on research activities as we are actively looking for a commercialization partner in Europe, offset by ● an increase of $1.8 million in VAC program expenses, primarily related to the accrual of the signature fee of £1.25 million ($1.6 million) to Cancer Research UK related to our license agreement and our early exercise of the option to acquire data generated in the Phase 1 clinical trial of VAC2 in non-small cell lung cancer. The decrease of $4.8 million in total research and development expenses for the nine months ended September 30, 2020 as compared to the same period in the prior year is mainly attributable to the following: ● a decrease of $5.0 million in OpRegen and other ophthalmic application expenses, attributable primarily to a decrease in manufacturing activities in 2020 as compared to 2019, ● a decrease of $1.0 million in OPC1 related expenses, primarily related to return of unspent project funds of approximately $0.8 million from a former Asterias service provider, ● a decrease of $0.7 million in Renevia and other related expenses as Renevia received a CE Mark in September 2019 and we are spending less on research activities as we are actively looking for a commercialization partner in Europe, offset by ● an increase of $1.9 million in VAC program expenses, primarily related to the accrual of the signature fee of £1.25 million ($1.6 million) to Cancer Research UK. 38 General and administrative expenses General and administrative expenses include employee and director compensation, consulting fees other than those paid for science-related consulting, facilities and equipment rent and maintenance related expenses, insurance costs allocated to general and administrative expenses, costs of patent applications, prosecution and maintenance, stock exchange-related costs, depreciation expense, marketing costs, legal and accounting costs, and other miscellaneous expenses which are allocated to general and administrative expense. The total net decrease of $1.0 million in general and administrative expenses for the three months ended September 30, 2020 compared to the same period in 2019, was primarily attributable to a $0.9 million reduction in compensation expenses, a $0.2 million reduction in Asterias Merger related expenses, a $0.1 million reduction in travel expenses, a $0.1 million reduction in accounting expenses and a $0.1 million reduction in office related expenses, offset by a $0.3 million increase in patent and legal expenses and a $0.2 million increase related to the cessation of shared services reimbursements. The total net decrease of $7.5 million in general and administrative expenses for the nine months ended September 30, 2020 compared to the same period in 2019, was primarily attributable to a $5.2 million reduction in Asterias Merger related expenses, a $1.9 million reduction in compensation costs, a $0.7 million reduction in accounting expenses, a $0.4 million reduction in travel expenses and a $0.3 million reduction in rent expenses, a $0.2 million reduction in office related expenses and a $0.1 million reduction in investor and public relations expenses, offset by a $0.9 million increase in legal and patent expenses and a $0.6 million increase related to the cessation of shared services reimbursements. Other income and expenses, net The following table shows the amount of other income and expenses, net, for the periods presented (in thousands): Three Months Ended September 30, (unaudited) 2020 2019 Other income and expenses, net Interest income, net $ 252 $ 399 Gain on sale of marketable securities 120 2,055 Unrealized loss on marketable equity securities (2,003 ) (4,458 ) Gain on sale of equity method investment in OncoCyte - 546 Unrealized loss on equity method investment in OncoCyte at fair value - (8,287 ) Unrealized gain on warrant liability 55 79 Other income, net 351 582 Total other expense, net $ (1,225 ) $ (9,084 ) Nine Months Ended September 30, (unaudited) 2020 2019 Other income and expenses, net Interest income, net $ 1,037 $ 1,278 Gain on sale of marketable securities 3,848 2,055 Unrealized loss on marketable equity securities (7,487 ) (3,134 ) Gain on sale of equity method investment in OncoCyte - 546 Unrealized gain on equity method investment in OncoCyte at fair value - 8,001 Unrealized gain on equity method investment in Asterias at fair value - 6,744 Unrealized gain on warrant liability 84 350 Other income, net 175 2,270 Total other (expense), income, net $ (2,343 ) $ 18,110 39 Interest income, net – During the three and nine months ended September 30, 2020, we earned $0.3 million and $1.0 million of interest income, respectively, from our promissory note with Juvenescence Limited (“Juvenescence”). During the three and nine months ended September 30, 2019, we earned $0.4 million and $1.1 million of interest income, respectively, from the same note. Gain on equity method investment in Asterias – Prior to the closing of the Asterias Merger on March 8, 2019, we owned 21.7 million shares of common stock of Asterias, which we accounted for at fair value using the equity method of accounting. The fair value of our Asterias shares was approximately $20.2 million as of March 8, 2019, the closing date of the Asterias Merger, based on $0.93 per share, which was calculated by multiplying: (i) $1.31, the closing price of our common shares on such date; by (ii) the Merger Exchange Ratio. The fair value of our Asterias shares was approximately $13.5 million as of December 31, 2018, based on the closing price of Asterias common stock of $0.62 per share on such date. Accordingly, we recorded an unrealized gain of $6.7 million for the year ended December 31, 2019, representing the change in fair value of Asterias common stock from December 31, 2018 to March 8, 2019. Gain on equity method investment in OncoCyte – Prior to September 11, 2019, Lineage elected to account for its shares of OncoCyte common stock at fair value using the equity method of accounting. Lineage sold 2.25 million shares of OncoCyte common stock for net proceeds of $4.2 million in July 2019. Accordingly, Lineage’s ownership in OncoCyte was reduced from 28% to 24%. Lineage sold an additional 4.0 million shares of OncoCyte common stock for net proceeds of $6.5 million on September 11, 2019. Lineage’s ownership in OncoCyte was further reduced to 16% at this time. Effective September 11, 2019, Lineage began accounting for its shares of OncoCyte common stock as marketable equity securities. As of December 31, 2019, Lineage had 8.4 million shares of OncoCyte common stock. These shares had a fair value of $19.0 million, based on the closing price of OncoCyte common stock of $2.25 per share on December 31, 2019. As of September 30, 2020, Lineage owned 3.6 million shares of OncoCyte common stock. These shares had a fair value of $5.0 million, based on the closing price of OncoCyte common stock of $1.39 per share on September 30, 2020. For the three months ended September 30, 2020, Lineage recorded an unrealized loss of $1.9 million related to the shares remaining at September 30, 2020 and the decrease in OncoCyte’s stock price from $1.91 at June 30, 2020 to $1.39 at September 30, 2020. For the three months ended September 30, 2019, Lineage recorded a realized gain of $0.6 million due to sales of OncoCyte shares in the period. Lineage also recorded an unrealized loss of $8.7 million due to the decrease in OncoCyte’s stock price from $2.49 per share at June 30, 2019 to $2.10 per share at September 30, 2019. $8.3 million of the unrealized loss was recorded as an unrealized loss on an equity method investment as it was prior to September 11, 2019; the remaining $0.4 million was recorded as an unrealized loss on marketable equity securities. For the nine months ended September 30, 2020, Lineage recorded a realized gain of $3.1 million due to sales of OncoCyte shares in the period. In the same period, Lineage also recorded an unrealized loss of $6.1 million related to its OncoCyte shares. The unrealized loss is comprised of $3.7 million related to the difference between the book cost basis of OncoCyte shares sold in the period versus the applicable prior month’s ending OncoCyte stock price and an additional $2.4 million related to the shares remaining at September 30, 2020 and the decrease in OncoCyte’s stock price from $2.25 at December 31, 2019 to $1.39 at September 30, 2020. For the nine months ended September 30, 2019, Lineage recorded a realized gain of $0.6 million due to sales of OncoCyte shares in the period. Lineage also recorded an unrealized gain of $7.6 million due to the increase in OncoCyte’s stock price from $1.38 per share at December 31, 2018 to $2.10 per share at September 30, 2019. $8.0 million of the unrealized gain was recorded as an unrealized gain on an equity method investment as it was prior to September 11, 2019; the remaining $0.4 million was recorded as an unrealized loss on marketable equity securities. 40 All share prices are determined based on the closing price of OncoCyte common stock on the NYSE American on the applicable dates, or the last day of trading of the applicable quarter, if the last day of a quarter fell on a weekend. We expect our other income and expenses, net, to continue to fluctuate each reporting period based on the changes in the market price of our OncoCyte shares, which could significantly impact our net income or loss reported in our condensed consolidated statements of operations for each period. Marketable equity securities - We also account for the shares we held in Hadasit Bio-Holdings (“HBL”) and AgeX as of September 30, 2020 as marketable equity securities, carried at fair market value on our consolidated balance sheets. For the three and nine months ended September 30, 2020, Lineage recorded realized gains of $0.1 million and $0.7 million, respectively, due to sales of AgeX shares in the period. Sales of HBL securities were negligible. For the three and nine months ended September 30, 2019, Lineage recorded a realized gain of $2.0 million due to sales of HBL and AgeX shares in the period. For the three and nine months ended September 30, 2020, we recorded unrealized losses of $0.1 million and $1.4 million, respectively. For the three months ended September 30, 2020, a majority of the unrealized loss was related to the difference between the book cost basis of AgeX shares sold in the period versus the applicable prior month’s ending AgeX stock price. For the nine months ended September 30, 2020, $0.5 million of the unrealized loss was related to the difference between the book cost basis of AgeX shares sold in the period versus the applicable prior month’s ending AgeX share price and an additional $0.8 million was related to the AgeX shares remaining at September 30, 2020 and the decrease in AgeX’s stock price from $1.82 at December 31, 2019 to $0.81 at September 30, 2020. For the three and nine months ended September 30, 2019, we recorded an unrealized loss of $4.0 million and $2.7 million, respectively, due to changes in fair market value of these marketable equity securities from June 30, 2019 to September 30, 2019 and December 31, 2018 to September 30, 2019. Other income (expense), net - Other income (expense), net, in 2020 and 2019 consist primarily of net foreign currency transaction gains and losses recognized by our subsidiaries Cell Cure and ES Cell International Pte. Ltd. (“ESI”), changes in the fair value of warrants issued by Cell Cure, dividend income and interest income, net. Foreign currency transaction gains and losses for the periods presented are principally related to the remeasurement of the U.S. dollar denominated notes payable by Cell Cure to Lineage. Income Taxes The market value of the shares of OncoCyte common stock we hold creates a deferred tax liability based on the closing prices of the shares, less our tax basis in the shares. The deferred tax liability generated by the OncoCyte shares that we hold as of September 30, 2020, is a source of future taxable income to us, as prescribed by ASC 740-10-30-17, that will more likely than not result in the realization of our deferred tax assets to the extent of the deferred tax liability. This deferred tax liability is determined based on the closing prices of the OncoCyte shares as of September 30, 2020. 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 (see Note 3). 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. 41 A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. Lineage established a full valuation allowance as of December 31, 2018 due to the uncertainty of realizing future tax benefits from its net operating loss carryforwards and other deferred tax assets, including foreign net operating losses generated by its subsidiaries. During the year ended December 31, 2019, a portion of the valuation allowance was released as it relates to Lineage’s indefinite lived assets that can be used against the indefinite lived liabilities. The amount of the valuation allowance released was $7.4 million; as new indefinite lived deferred tax assets are generated, we will continue to book provision benefits until the deferred tax liability position is exhausted, barring any new developments. For the three and nine months ended September 30, 2019, Lineage recorded a $1.0 million and $6.6 million valuation allowance release and corresponding benefit for income taxes. For the three and nine months ended September 30, 2020, Lineage recorded a $0.2 million deferred tax benefit for income taxes. We expect that deferred income tax expense or benefit we record each reporting period, if any, will vary depending on the change in the closing stock prices of OncoCyte shares from period to period and the related changes in those deferred tax liabilities and our deferred tax assets and other credits, including changes in the valuation allowance, for each period. See Note 3 to our consolidated financial statements included elsewhere in this Report for a description of the Asterias Merger that was completed on March 8, 2019. We have concluded that an ownership change did occur after the Asterias Merger, and the acquired operating loss carryforwards are subject to limitation under Section 382 of the Internal Revenue Service Code; Lineage will only be able to utilize $52.8 million of these operating loss carryforwards. Liquidity and Capital Resources At September 30, 2020, we had $38.0 million of cash, cash equivalents and marketable equity securities on hand, which includes our investments in HBL, AgeX and OncoCyte. 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 September 30, 2020, we had an accumulated deficit of $296.1 million, working capital of $32.0 million and shareholders’ equity of $90.2 million. We evaluated the projected cash flows for Lineage and our subsidiaries, and we believe that our $38.0 million in cash, cash equivalents and marketable equity securities provide sufficient cash, cash equivalents, and liquidity to carry out our current planned operations through at least twelve months from the issuance date of our condensed consolidated interim financial statements included elsewhere in this Report. If we need near term working capital or liquidity to supplement our cash and cash equivalents for our operations, we may sell some, or all, of our investments, as necessary. On March 8, 2019, the Asterias Merger closed and Asterias became our wholly owned subsidiary. We began consolidating Asterias’ operations and results with our operations and results beginning on March 8, 2019. We have made extensive reductions in headcount and reduced non-clinical related spend, in each case, as compared to Asterias’ operations before the merger. We have implemented significant cost savings initiatives and anticipate reduced operational spend in 2020 compared to prior periods. 42 The COVID-19 pandemic has impacted patient enrollment in our OpRegen Phase 1/2a multicenter clinical trial and 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. Additionally, patients may choose not to enroll or continue participating in clinical trials as a result of the pandemic. At this point in time, the majority of our sites are back up and enrolling. We are unable to predict with confidence if there will be future patient enrollment delays and difficulties as the COVID-19 pandemic continues. If patient enrollment is delayed for an extended period of time, such clinical trials could be delayed or otherwise adversely affected. Our inability to enroll a sufficient number of patients for any of our current or future clinical trials could result in significant delays. We may increase spending later in the year to accelerate clinical trial activities and try to mitigate the impact of the COVID-19 related enrollment delays. Our projected cash flows are subject to various risks and uncertainties, and the unavailability or inadequacy of financing to meet future capital needs could force us to modify, curtail, delay, or suspend some or all aspects of our current planned operations. Our determination as to when we will seek new financing and the amount of financing that we will need will be based on our evaluation of the progress we make in our research and development programs, any changes to the scope and focus of those programs, any changes in grant funding for certain of those programs, and projection of future costs, revenues, and rates of expenditure. Our ability to raise additional funds may be adversely impacted by deteriorating global economic conditions and the disruptions to and volatility in the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic. We may be required to delay, postpone, or cancel our clinical trials or limit the number of clinical trial sites, unless we are able to obtain adequate financing. We cannot assure that adequate financing will be available on favorable terms, if at all. Sales of additional equity securities by us or our subsidiaries and affiliates could result in the dilution of the interests of our current shareholders. Cash flows used in operating activities Net cash used in operating activities of $14.1 million for the nine months ended September 30, 2020 primarily reflects the loss from operations of $20.6 million less the changes in assets and liabilities of $2.0 million. These items were offset primarily by non-cash expenses of $1.8 million of depreciation and amortization and $1.7 million for stock-based compensation. The unrealized loss on marketable securities and deferred tax benefit are non-cash items that had no effect on cash flows. Net cash used in operating activities of $26.4 million for the nine months ended September 30, 2019 primarily reflects the loss from operations of $32.0 million less the changes in assets and liabilities of $1.3 million. These items were offset primarily by non-cash expenses of $3.0 million for stock-based compensation and $2.3 million of depreciation and amortization. The unrealized gains on equity method investments and marketable securities and deferred tax benefit are non-cash items that had no effect on cash flows. Cash flows provided by investing activities Cash provided by investing activities of $12.1 million for the nine months ended September 30, 2020 was associated primarily with receipts of $10.9 million from sales of a portion of our OncoCyte holdings and $1.2 million in sales of a portion of our AgeX holdings. Cash provided by investing activities of $16.2 million for the nine months ended September 30, 2019 was associated primarily with receipts of $10.7 million from sales of a portion of our OncoCyte holdings, $1.6 million in sales of a portion of our AgeX holdings and $1.2 million in sales of a portion of our HBL holdings as well as the receipt of $3.1 million of cash that Asterias had on the closing date of the Asterias Merger, offset by $0.4 million in purchases of equipment and other assets. 43 Cash flows provided by financing activities Cash provided by financing activities of $25.1 million for the nine months ended September 30, 2020 was associated primarily with proceeds of $24.6 million from payment of the Juvenescence promissory note and proceeds of $0.5 million from a Paycheck Protection Program (“PPP”) loan under the Coronavirus Aid, Relief and Economic Security (“CARES”) Act. Cash provided by financing activities of $0.6 million for the nine months ended September 30, 2019 was associated primarily with $0.7 million in landlord reimbursements for tenant improvements, offset by $0.1 million in common shares received and retired for employee taxes paid. Off-Balance Sheet Arrangements As of September 30, 2020 and December 31, 2019, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Commission Regulation S-K. Item 3. Quantitative and Qualitative Disclosures about Market Risk Under Commission rules and regulations, as a smaller reporting company, we are not required to provide the information required by this item.