Lineage Cell Therapeutics(LCTX) - 2020 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Forward-Looking Statements This section outlines forward-looking statements, acknowledging inherent risks and uncertainties that could cause actual results to differ materially from projections - Forward-looking statements cover plans for research, development, and commercialization of product candidates, including the initiation, progress, success, cost, and timing of clinical trials[8] - Key factors that may cause actual results to differ materially include risks listed under Part II, Item 1A, 'Risk Factors' in this report and the most recent Annual Report on Form 10-K[8] - The potential effects of the COVID-19 pandemic on operations are explicitly mentioned as a forward-looking statement area[8] Recent Transactions Affecting Our Corporate Organization This section details the Asterias Merger, where Lineage acquired Asterias Biotherapeutics, Inc. on March 8, 2019, after previously deconsolidating its investment - Lineage Cell Therapeutics, Inc. acquired Asterias Biotherapeutics, Inc. on March 8, 2019, converting Asterias common stock into Lineage common shares at a 0.71 exchange ratio[10] - Lineage had previously deconsolidated Asterias effective May 13, 2016, due to a decrease in ownership from 57.1% to 48.7%, and accounted for its investment using the equity method at fair value until the merger[11] Item 1. Financial Statements This section presents Lineage Cell Therapeutics' unaudited condensed consolidated financial statements, including balance sheets, statements of operations, and cash flows Condensed Consolidated Balance Sheets (March 31, 2020 vs. December 31, 2019, in millions) | Metric | March 31, 2020 | December 31, 2019 | | :--------------------------------- | :------------- | :---------------- | | Total Current Assets | $52.3 | $57.5 | | Total Assets | $118.9 | $125.5 | | Total Current Liabilities | $7.0 | $6.5 | | Total Liabilities | $14.1 | $14.2 | | Total Shareholders' Equity | $104.8 | $111.2 | Condensed Consolidated Statements of Operations (Three Months Ended March 31, 2020 vs. 2019, in thousands) | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | | Total Revenues | $514 | $928 | | Gross Profit | $420 | $860 | | Total Operating Expenses | $7,858 | $13,621 | | Loss from Operations | $(7,438) | $(12,761) | | Total Other (Expense) Income, Net | $(990) | $47,673 | | Net (Loss)/Income | $(8,428) | $39,296 | | Net (Loss)/Income Attributable to Lineage | $(8,399) | $39,310 | | Basic EPS | $(0.06) | $0.30 | | Diluted EPS | $(0.06) | $0.30 | Condensed Consolidated Statements of Cash Flows (Three Months Ended March 31, 2020 vs. 2019, in thousands) | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | | Net Cash Used in Operating Activities | $(5,026) | $(9,314) | | Net Cash Provided by Investing Activities | $5,256 | $2,946 | | Net Cash (Used by) Provided by Financing Activities | $(10) | $606 | | Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash | $293 | $(5,709) | | Cash, Cash Equivalents and Restricted Cash at End of Period | $10,389 | $18,690 | NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS This section provides detailed notes to the interim financial statements, covering organization, liquidity, accounting policies, and specific financial events 1. Organization and Business Overview Lineage Cell Therapeutics is a clinical-stage biotechnology company developing novel cell therapies for retinal diseases, neurological conditions, and cancer - Lineage is a clinical-stage biotechnology company developing novel cell therapies for unmet medical needs, focusing on degenerative retinal diseases, neurological conditions, and cancer[22] - The company has three allogeneic cell therapy programs in clinical development: OpRegen (Phase 1/2a for dry AMD), OPC1 (Phase 1/2a for acute spinal cord injuries), and VAC2 (Phase 1 for non-small cell lung cancer)[27] - Lineage is actively seeking a commercialization partner for Renevia, its proprietary three-dimensional scaffold, which received a CE Mark in September 2019[23] 2. Basis of Presentation, Liquidity and Summary of Significant Accounting Policies This section outlines the basis of financial statement presentation, liquidity assessment, and key accounting policies, including the impact of the COVID-19 pandemic - Lineage's financial statements are prepared in accordance with GAAP for interim financial information, with certain disclosures condensed or omitted[30] - The company's $25.8 million in cash, cash equivalents, and marketable equity securities at March 31, 2020, are believed to provide sufficient liquidity for current planned operations through at least twelve months from the issuance date[35] - The COVID-19 pandemic may adversely impact the company's ability to raise additional funds and could necessitate delays or cancellations of clinical trials[38] - Lineage adopted ASC 842 (Leases) on January 1, 2019, resulting in the recognition of Right-of-Use (ROU) assets and lease liabilities for operating leases with terms greater than twelve months[52][56] 3. Asterias Merger The Asterias Merger, completed on March 8, 2019, resulted in Asterias becoming a wholly-owned subsidiary of Lineage, with a total purchase price of $52.6 million - The Asterias Merger closed on March 8, 2019, with Asterias becoming a wholly owned subsidiary of Lineage, and former Asterias stockholders received 0.71 Lineage common shares per Asterias share[62] Asterias Merger Purchase Price Allocation (in thousands) | Category | Amount | | :--------------------------------------- | :------- | | Cash and cash equivalents | $3,117 | | Prepaid expenses and other assets | $660 | | Machinery and equipment | $308 | | Long-lived intangible assets - royalty contracts | $650 | | Acquired in-process research and development (IPR&D) | $46,540 | | Accrued liabilities and accounts payable | $982 | | Liability classified warrants | $867 | | Deferred license revenue | $200 | | Long-term deferred income tax liability | $10,753 | | Estimated goodwill | $10,672 | | Total Purchase Price | $52,580 | - The IPR&D assets, valued at $46.5 million, primarily consist of the OPC1 program ($31.7 million) and the VAC2 program ($14.8 million), valued using a probability-weighted discounted cash flow method[71][72] - Lineage recorded an unrealized gain of $6.7 million for the three months ended March 31, 2019, representing the change in fair value of its previously held 38% interest in Asterias common stock from December 31, 2018, to March 8, 2019[87] 4. Accounting for Common Stock of OncoCyte, at Fair Value Lineage's accounting for its OncoCyte common stock transitioned to marketable equity securities after reducing its ownership below 20% in September 2019 - Lineage's ownership in OncoCyte was reduced to 16% on September 11, 2019, leading to a change in accounting from the equity method to marketable equity securities[89] OncoCyte Share Holdings and Fair Value (in millions, except per share) | Metric | March 31, 2020 | December 31, 2019 | | :-------------------------------- | :------------- | :---------------- | | Shares Owned (millions) | 6.0 | 8.4 | | Fair Value (in millions) | $14.8 | $19.0 | | Closing Price Per Share | $2.45 | $2.25 | - For the three months ended March 31, 2020, Lineage recorded a realized gain of $1.1 million from OncoCyte share sales and a net unrealized loss of $0.3 million on marketable equity securities[92] - For the three months ended March 31, 2019, Lineage recorded an unrealized gain of $37.7 million on its equity method investment in OncoCyte due to an increase in stock price[92] 5. Sale of Significant Ownership Interest in AgeX to Juvenescence Limited In August 2018, Lineage sold 14.4 million AgeX shares to Juvenescence Limited for $43.2 million, receiving a convertible promissory note - Lineage sold 14.4 million shares of AgeX common stock to Juvenescence Limited for $43.2 million in August 2018[94] - A convertible promissory note for $21.6 million was issued by Juvenescence to Lineage, bearing 7% annual interest and maturing on August 30, 2020[95] - For the three months ended March 31, 2020, Lineage recognized $378 thousand in interest income on the promissory note, with a principal and accrued interest balance of $24.0 million[96] - Shared services with AgeX were terminated by September 30, 2019[99] 6. Property and Equipment, Net Lineage's net property and equipment decreased to $7.5 million at March 31, 2020, from $8.2 million at December 31, 2019 Property and Equipment, Net (in thousands) | Category | March 31, 2020 | December 31, 2019 | | :-------------------------------- | :------------- | :---------------- | | Equipment, furniture and fixtures | $4,054 | $4,148 | | Leasehold improvements | $2,773 | $2,862 | | Right-of-use assets | $5,720 | $5,756 | | Accumulated depreciation and amortization | $(5,008) | $(4,591) | | Property and equipment, net | $7,539 | $8,175 | - Depreciation and amortization expense was $212 thousand for the three months ended March 31, 2020, compared to $269 thousand for the same period in 2019[101] 7. Goodwill and Intangible Assets, Net Lineage's goodwill and intangible assets, net, totaled $47.8 million at March 31, 2020, primarily comprising acquired IPR&D and patents Goodwill and Intangible Assets, Net (in thousands) | Category | March 31, 2020 | December 31, 2019 | | :--------------------------------------- | :------------- | :---------------- | | Goodwill | $10,672 | $10,672 | | Acquired IPR&D - OPC1 | $31,700 | $31,700 | | Acquired IPR&D - VAC2 | $14,840 | $14,840 | | Acquired patents | $18,953 | $18,953 | | Acquired royalty contracts | $650 | $650 | | Total intangible assets | $66,143 | $66,143 | | Accumulated amortization | $(18,393) | $(17,895) | | Intangible assets, net | $47,750 | $48,248 | - Lineage recognized $0.5 million of amortization expense in research and development expenses for both the three months ended March 31, 2020 and 2019[104] 8. Accounts Payable and Accrued Liabilities Accounts payable and accrued liabilities increased to $5.3 million at March 31, 2020, driven by higher accounts payable, partially offset by reduced compensation accruals Accounts Payable and Accrued Liabilities (in thousands) | Category | March 31, 2020 | December 31, 2019 | | :---------------------- | :------------- | :---------------- | | Accounts payable | $3,519 | $2,427 | | Accrued compensation | $995 | $1,549 | | Accrued liabilities | $807 | $1,246 | | Other current liabilities | $- | $4 | | Total | $5,321 | $5,226 | - In 2019, Lineage incurred and paid $2.0 million in change-in-control and separation payments to Asterias employees terminated due to the merger, and an additional $0.5 million in separation payments to other Asterias employees[105][106] - Lineage also incurred $0.7 million in separation payments for certain employees due to the relocation of its corporate headquarters to Carlsbad, California, with all payments completed by December 31, 2019[107] 9. Fair Value Measurements Lineage measures cash, marketable securities, and liability-classified warrants at fair value, categorizing inputs into a three-level hierarchy Fair Value Measurements (March 31, 2020, in thousands) | Category | Balance | Level 1 | Level 2 | Level 3 | | :---------------------- | :------ | :------ | :------ | :------ | | Assets: | | | | | | Cash and cash equivalents | $9,832 | $9,832 | $- | $- | | Marketable securities | $15,933 | $15,933 | $- | $- | | Liabilities: | | | | | | Lineage Warrants | $12 | $- | $- | $12 | | Cell Cure Warrants | $235 | $- | $- | $235 | - Marketable securities (OncoCyte, AgeX, HBL) have readily determinable fair values quoted on active stock exchanges (NYSE American or TASE), classifying them as Level 1 inputs[111] - Lineage Warrants and Cell Cure Warrants are classified as Level 3 liabilities, with their fair values determined using Black-Scholes option pricing models[112][113] - For the three months ended March 31, 2020, Lineage recognized an unrealized loss of $8 thousand on Lineage Warrants and $27 thousand on Cell Cure Warrants, primarily due to the reduction in their remaining lives[112][113] 10. Related Party Transactions Lineage previously had shared services with OncoCyte and AgeX, largely terminated by September 2019, and incurred legal costs for Asterias Merger litigation - Shared services with AgeX were terminated by September 30, 2019, and with OncoCyte by December 31, 2019, for most services[115] - For the three months ended March 31, 2019, Lineage charged $725 thousand in Use Fees to OncoCyte and AgeX, offsetting general and administrative expenses ($493 thousand) and research and development expenses ($232 thousand)[120] - Lineage incurred $309 thousand in legal expenses through March 31, 2020, for the defense of a director and Broadwood Partners, L.P. in litigation related to the Asterias Merger[124] 11. Shareholders' Equity Lineage is authorized to issue 2 million preferred shares and 250 million common shares, with 149.8 million common shares outstanding as of March 31, 2020 - As of March 31, 2020, Lineage had 149,817,816 common shares issued and outstanding[128] - Under the 2017 Sales Agreement, Lineage can sell up to $25 million in common shares through Cantor Fitzgerald, with $24.1 million remaining available as of March 31, 2020[129] Changes in Shareholders' Equity (Three Months Ended March 31, 2020, in thousands) | Category | Common Shares Amount | Accumulated Deficit | Noncontrolling Interest/(Deficit) | Accumulated Other Comprehensive Income | Total Shareholders' Equity | | :--------------------------------------- | :------------------- | :------------------ | :------------------------------ | :------------------------------------- | :------------------------- | | Balance at December 31, 2019 | $387,062 | $(273,422) | $(1,712) | $(681) | $111,247 | | Shares issued upon vesting of RSUs, net | $(2) | $- | $- | $- | $(2) | | Stock-based compensation | $626 | $- | $- | $- | $626 | | Foreign currency translation loss | $- | $- | $- | $1,315 | $1,315 | | NET INCOME/(LOSS) | $- | $(8,399) | $(29) | $- | $(8,428) | | Balance at March 31, 2020 | $387,686 | $(281,821) | $(1,741) | $634 | $104,758 | 12. Stock-Based Awards Lineage operates under the 2012 Equity Incentive Plan and the assumed Asterias Equity Plan, granting stock options and restricted stock units 2012 Plan Activity (in thousands, except per share amounts) | Metric | December 31, 2019 | March 31, 2020 | | :-------------------------------- | :---------------- | :------------- | | Shares Available for Grant | 9,157 | 6,258 | | Number of Options Outstanding | 14,710 | 17,609 | | Number of RSUs Outstanding | 166 | 145 | | Weighted Average Exercise Price | $2.17 | $1.70 | Stock-Based Compensation Expense (in thousands) | Category | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :------------------------------ | :-------------------------------- | :-------------------------------- | | Research and development | $96 | $122 | | General and administrative | $530 | $1,318 | | Total stock-based compensation expense | $626 | $1,440 | - The decrease in stock-based compensation expense for the three months ended March 31, 2020, was primarily due to a reduction in general and administrative expenses[137] 13. Income Taxes Lineage's interim income tax provision is based on an estimated annual effective tax rate, with adjustments for marketable securities and deferred tax liabilities - Lineage's OncoCyte common stock holdings create a deferred tax liability, which is a source of future taxable income supporting the realization of deferred tax assets[140] - A deferred tax liability of $10.8 million was recorded in connection with the Asterias Merger, primarily due to fair value adjustments for acquired IPR&D assets[142] - A portion of the valuation allowance was released at December 31, 2019, related to indefinite-lived assets that can be used against indefinite-lived liabilities[143] - For the three months ended March 31, 2020, no income tax provision or benefit was recorded, as taxable income from OncoCyte share sales was offset by net operating loss carryforwards[144] - For the three months ended March 31, 2019, Lineage recorded a $4.4 million valuation allowance release and corresponding tax benefit, primarily related to state R&D credits and federal net operating losses[145] 14. Supplemental Cash Flow Information This section provides supplemental cash flow information, including cash paid for interest and non-cash investing and financing activities Supplemental Cash Flow Information (in thousands) | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | | Cash paid during period for interest | $7 | $7 | | Issuance of common shares for the Asterias Merger | $- | $32,353 | | Assumption of liabilities in the Asterias Merger | $- | $1,136 | | Assumptions of warrants in the Asterias Merger | $- | $867 | 15. Commitments and Contingencies Lineage is subject to various commitments and contingencies, including lease agreements, a research option agreement, ongoing litigation, and Israeli government grant obligations Future Minimum Lease Commitments (in thousands) | Year Ending December 31, | Operating Leases | Finance Leases | | :----------------------- | :--------------- | :------------- | | 2020 | $1,199 | $32 | | 2021 | $1,539 | $36 | | 2022 | $1,518 | $36 | | 2023 | $400 | $15 | | 2024 | $308 | $- | | Thereafter | $739 | $- | | Total lease payments | $5,703 | $119 | - Lineage extended its Research and Option Agreement with Gyroscope Therapeutics for OpRegen delivery, with an extension fee of $0.5 million, and a no-cost extension through September 10, 2020, due to the COVID-19 pandemic[164] - A putative class action lawsuit challenging the Asterias Merger is pending in Delaware Chancery Court, with defendants having moved to dismiss the complaint[169] - Cell Cure has a license agreement with Hadasit for intellectual property related to human stem cell-derived photoreceptor and retinal pigment epithelial cells, involving royalties and potential milestone payments up to $3.5 million[173][175] - Cell Cure is required to pay royalties to the Israel Innovation Authority (IIA) on future product sales from grant-funded know-how, with restrictions on transferring intellectual property or manufacturing outside of Israel[178][179] 16. Subsequent Events Subsequent events include Lineage receiving a PPP loan, selling additional OncoCyte shares, acquiring VAC2 trial data, and filing a new at-the-market offering - In April 2020, Lineage received a $523 thousand PPP loan under the CARES Act, with potential for forgiveness if conditions related to payroll and other qualifying expenses are met[180] - Lineage sold 1,672,689 shares of OncoCyte common stock for $3.7 million on April 23, 2020, reducing its ownership to 6.3%[183] - Lineage exercised its option to acquire data from the VAC2 clinical trial and entered a license agreement with Cancer Research UK, deferring a £1.25 million signature fee and agreeing to milestone payments up to £8 million and sales-based milestones up to £22.5 million[184][185] - On May 1, 2020, Lineage filed a new Registration Statement on Form S-3 and entered into a new Controlled Equity Offering Sales Agreement to sell up to $25 million in common shares through an at-the-market offering[187] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Company and Business Overview Lineage Cell Therapeutics is a clinical-stage biotechnology company focused on developing allogeneic cell therapies and leveraging equity holdings as capital sources - Lineage is a clinical-stage biotechnology company developing novel cell therapies for degenerative retinal diseases (OpRegen), neurological conditions (OPC1), and cancer (VAC2)[192][193][194] - The company holds equity investments in OncoCyte (6.3%) and AgeX (2.0%), with a combined value of approximately $11.9 million as of May 5, 2020, and a convertible promissory note from Juvenescence valued at $24.0 million[197] - These securities holdings are considered a significant source of capital to fund operations, offering an alternative to issuing additional Lineage securities[198] Critical Accounting Policies This section highlights critical accounting policies, including business combinations, goodwill and IPR&D accounting, lease accounting, and the company's going concern assessment - Business combinations, such as the Asterias Merger, are accounted for under ASC Topic 805, requiring purchase price measurement at fair value and recognition of acquired assets (including IPR&D) and liabilities at fair value, with any excess recorded as goodwill[201] - Goodwill and acquired IPR&D are indefinite-lived intangible assets, not amortized but tested for impairment at least annually, or more frequently if circumstances indicate potential impairment[202][203] - Leases are accounted for under ASC 842, recognizing right-of-use (ROU) assets and lease liabilities for leases with terms over twelve months, classified as either financing or operating[204][205][206] - Lineage assesses going concern uncertainty and believes its cash, cash equivalents, and marketable securities at March 31, 2020, are sufficient to fund planned operations for at least twelve months[207] Results of Operations Lineage experienced a 45% decrease in total revenues and a 42% decrease in operating expenses for Q1 2020, resulting in a net loss compared to prior year's net income Revenues and Cost of Sales Total revenues decreased by $0.4 million (45%) to $0.5 million for Q1 2020, primarily due to reduced grant revenues, leading to a 51% decrease in gross profit Revenues and Cost of Sales (in thousands) | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | $ Change | % Change | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :------- | :------- | | Grant revenue | $348 | $749 | $(401) | (54)% | | Royalties from product sales and license fees | $166 | $86 | $80 | 93% | | Sale of research products and services | $- | $93 | $(93) | (100)% | | Total revenues | $514 | $928 | $(414) | (45)% | | Cost of sales | $(94) | $(68) | $(26) | (38)% | | Gross profit | $420 | $860 | $(440) | (51)% | - The decrease in total revenues was primarily driven by a $0.4 million reduction in grant revenues, mainly from Cell Cure's OpRegen development and the NIH grant, due to the timing of grant-related activities[210][211] Operating expenses Total operating expenses decreased by $5.8 million (42%) to $7.9 million for Q1 2020, driven by reductions in R&D and G&A expenses Operating Expenses (in thousands) | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | $ Change | % Change | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :------- | :------- | | Research and development expenses | $3,339 | $4,961 | $(1,622) | (33)% | | General and administrative expenses | $4,519 | $8,660 | $(4,141) | (48)% | Research and Development Expenses by Program (in thousands) | Program | 2020 Amount | 2019 Amount | 2020 Percent of Total | 2019 Percent of Total | | :-------------------------------- | :---------- | :---------- | :-------------------- | :-------------------- | | OpRegen and other ophthalmic applications | $1,869 | $3,659 | 56% | 74% | | OPC1 | $1,221 | $662 | 37% | 13% | | VAC2 | $114 | $111 | 3% | 2% | | Renevia and all other | $135 | $529 | 4% | 11% | | Total research and development expenses | $3,339 | $4,961 | 100% | 100% | - The $1.6 million decrease in R&D expenses was mainly due to a $1.8 million reduction in OpRegen manufacturing activities, a $0.4 million decrease in Renevia expenses, offset by a $0.6 million increase in OPC1 development activities[217] - The $4.1 million decrease in G&A expenses was primarily due to a $3.3 million reduction in Asterias-related expenses, a $0.9 million reduction in compensation costs, and a $0.4 million reduction in accounting expenses[218] Other income and expenses, net Total other income and expenses, net, shifted from a $47.7 million net income in Q1 2019 to a $1.0 million net expense in Q1 2020, primarily due to the absence of large unrealized gains on equity method investments Other Income and Expenses, Net (in thousands) | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | | Interest income, net | $405 | $442 | | Gain on equity method investment in Asterias at fair value | $- | $6,744 | | Gain on equity method investment in OncoCyte at fair value | $- | $37,713 | | Gain on sale of marketable securities | $1,258 | $- | | Unrealized (loss) gain on marketable equity securities | $(1,338) | $1,931 | | Unrealized gain on warrant liability | $35 | $37 | | Other income (expense), net | $(1,350) | $806 | | Total other income (expense), net | $(990) | $47,673 | - The significant decrease in other income was primarily due to the absence of a $37.7 million unrealized gain on OncoCyte investment and a $6.7 million unrealized gain on Asterias investment, both recorded in Q1 2019[220][223] - For Q1 2020, Lineage recorded a $1.1 million realized gain from OncoCyte share sales and a $0.2 million realized gain from AgeX share sales[223][226] - Unrealized loss on marketable equity securities was $1.0 million in Q1 2020, compared to an unrealized gain of $1.9 million in Q1 2019, primarily due to changes in fair market value of HBL and AgeX shares[227] Income Taxes Lineage's income tax expense or benefit fluctuates based on marketable equity securities' fair values and deferred tax liabilities, with no tax provision recorded in Q1 2020 - The market value of OncoCyte common stock creates a deferred tax liability, serving as a source of future taxable income to realize deferred tax assets[229] - A $10.8 million deferred tax liability was recorded as part of the Asterias Merger acquisition accounting, primarily related to fair value adjustments for acquired IPR&D[230] - A portion of the valuation allowance was released at December 31, 2019, related to indefinite-lived assets that can be used against indefinite-lived liabilities[231] - For the three months ended March 31, 2020, no income tax provision or benefit was recorded, as taxable income from OncoCyte sales was offset by net operating loss carryforwards[232] - For the three months ended March 31, 2019, Lineage recorded a $4.4 million valuation allowance release and corresponding tax benefit[233] Liquidity and Capital Resources Lineage had $25.8 million in cash and marketable securities at March 31, 2020, deemed sufficient for 12 months, but faces risks from the COVID-19 pandemic - At March 31, 2020, Lineage had $25.8 million in cash, cash equivalents, and marketable equity securities, deemed sufficient to fund planned operations for at least 12 months[236][237] - The company had an accumulated deficit of $281.8 million and working capital of $45.3 million as of March 31, 2020[237] - Cost savings initiatives implemented after the Asterias Merger are expected to reduce operational spend in 2020[238] - The COVID-19 pandemic has impacted patient enrollment in OpRegen and VAC2 clinical trials and may adversely affect the ability to raise additional funds[239][240] - Net cash used in operating activities was $5.0 million for Q1 2020, primarily reflecting the loss from operations[241] - Net cash provided by investing activities was $5.3 million for Q1 2020, mainly from sales of OncoCyte ($5.0 million) and AgeX ($0.3 million) common shares[243] Off-Balance Sheet Arrangements Lineage Cell Therapeutics, Inc. did not have any off-balance sheet arrangements as of March 31, 2020, and December 31, 2019 - Lineage did not have any off-balance sheet arrangements as of March 31, 2020, and December 31, 2019[246] Item 3. Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, Lineage Cell Therapeutics, Inc. is not required to provide quantitative and qualitative disclosures about market risk - As a smaller reporting company, Lineage is exempt from providing quantitative and qualitative disclosures about market risk[247] Item 4. Controls and Procedures Management evaluated the effectiveness of Lineage's disclosure controls and procedures as of March 31, 2020, and determined them to be effective - Management determined that Lineage's disclosure controls and procedures were effective as of March 31, 2020[248] - No material changes in internal control over financial reporting occurred during the period covered by this report[249] PART II - OTHER INFORMATION Item 1. Legal Proceedings This section incorporates by reference the litigation details from Note 15, 'Commitments and Contingencies,' highlighting the unpredictable nature and potential costs of legal proceedings - Information on legal proceedings is incorporated by reference from Note 15, 'Commitments and Contingencies'[251] - Litigation proceedings are inherently unpredictable and can involve significant expense and diversion of management's attention[252] Item 1A. Risk Factors This section outlines significant risks that could adversely affect Lineage's business, financial condition, results of operations, or growth prospects - An investment in Lineage's common shares involves a high degree of risk, and investors should carefully consider all risk factors[253] - Risk factors are updated to reflect changes from the previous Annual Report on Form 10-K[253] Risks Related to Our Business Operations and Capital Requirements Lineage faces risks from ongoing operating losses, the need for substantial capital, potential impacts of the COVID-19 pandemic, and litigation related to the Asterias Merger - Lineage has incurred significant operating losses since inception, with a $281.8 million accumulated deficit as of March 31, 2020, and expects losses to continue[256] - The company's ability to raise additional funds is crucial for R&D and marketing, but may be adversely impacted by deteriorating global economic conditions and the COVID-19 pandemic[259] - A putative class action lawsuit challenging the Asterias Merger is pending, and an adverse ruling could result in additional payments and costs[261][262] - Lineage's ability to use net operating losses (NOLs) to offset future taxable income may be limited by ownership changes (e.g., Section 382 of the IRC) and state-level restrictions[265][266] - The value of Lineage's equity investments in public companies like OncoCyte and AgeX fluctuates with their stock prices and is subject to business, regulatory, and market risks, including the COVID-19 pandemic[277] - Lineage received a $523 thousand PPP loan, but there is no assurance that all or a portion of it will be forgiven[280] Risks Related to Government Regulation Lineage's operations are subject to extensive healthcare fraud and abuse laws, complex regulatory approval processes, and potential disruptions from government actions or global health crises - Lineage's operations are subject to federal and state healthcare fraud and abuse laws (e.g., Anti-Kickback Statute, False Claims Act, HIPAA), and non-compliance could result in significant penalties[282][283][284][286] - Regulatory approval for therapeutic and medical device products is expensive, lengthy, and uncertain, with potential for additional scrutiny for novel cell-based products[287][288] - Government-imposed bans or restrictions and religious/ethical concerns about hES cells could limit stem cell research and product development[289] - Commercial success depends on obtaining reimbursement and coverage from various payors, which is a time-consuming and costly process with no assurance of consistent or adequate rates[290][291][292] - Disruptions at the FDA and other government agencies, particularly due to funding shortages or global health concerns like COVID-19, could negatively impact regulatory review and approval timelines[294][295][296] - The ACA and potential future changes to healthcare laws could adversely affect Lineage's business through increased costs, rebates, and pricing scrutiny[297][298][299][300] Risks Related to Our Clinical Development and Commercial Operations Clinical studies are costly, lengthy, and uncertain, with commercial success dependent on market acceptance, manufacturing complexity, and external factors like the COVID-19 pandemic and Brexit - Clinical studies are costly, time-consuming, and subject to risks such as inability to generate satisfactory data, delays in securing investigators, slow patient enrollment (exacerbated by COVID-19), and negative or inconclusive results[309][310][312][317] - Interim, topline, and preliminary data from clinical trials are subject to change and audit, and may not be predictive of final results, potentially harming business prospects[319][320] - The commercial success of product candidates depends on market acceptance by physicians, patients, and payors, influenced by efficacy, safety, cost, and competition[325][326][327] - Manufacturing cell-based products is complex and expensive, with reliance on third parties introducing risks of production delays, supply shortages, and compliance issues[334][336][337] - The ongoing COVID-19 pandemic has adversely affected clinical trial enrollment and operations, and its full impact on business, operating results, and financial condition is uncertain[340][341][342][344][348][349] - Brexit may adversely impact regulatory approvals, impose restrictions or taxes on imports into the EU, and require additional expenses for development and commercialization[351][352] - Product liability claims could result in substantial liability and costs, even if claims lack merit, and insurance coverage may be insufficient[354][355][356][357] - Israeli government grants for Cell Cure's R&D activities impose restrictions on manufacturing products and transferring know-how outside of Israel, potentially requiring approvals and penalties[358][359][360][364][365][367] Risks Related to our Intellectual Property Lineage's intellectual property may be insufficient to protect its products, facing challenges from competitors, costly litigation, and government rights over grant-funded IP - The patent positions of pharmaceutical and biotechnology companies are uncertain, and Lineage's patents may not provide meaningful protection, be challenged, or have inadequate terms[375][376] - Lineage may incur substantial costs in litigation to defend or enforce its patent and trade secret rights, and may not have the financial resources to do so[378] - There is no certainty that pending or future patent applications will result in issued patents, or that protection will be sufficient in all key markets[379] - Intellectual property developed using government grants is subject to certain rights maintained by those governments, potentially requiring licenses or grants of rights[382] - Failure to meet obligations under license agreements could result in the loss of rights to key technologies, leading to costly litigation and impacting product development[384] Risks Related to our Dependence on Third Parties Lineage's dependence on future collaborations, CROs for clinical trials, and external funding sources introduces risks of non-performance, delays, and reduced profitability - Lineage may become dependent on collaborative arrangements for R&D and product marketing, which carry risks of partner termination, non-performance, or competition[386][387][388] - The company relies on third parties (CROs, medical institutions) to conduct clinical trials, and their failure to perform or delays (including due to COVID-19) could extend, delay, or terminate preclinical development and clinical trials[389][390] - Continued funding from CIRM for programs like OPC1 is not assured, and alternative funding mechanisms may be required, potentially delaying development[391] - Reliance on marketing partners or contract sales companies for commercialization could result in lower gross profits compared to direct sales[392][393] Risks Pertaining to Our Common Shares The market price of Lineage's common shares is highly volatile, influenced by various factors, and the company does not pay cash dividends, while insider ownership and activist campaigns pose additional risks - The market price of Lineage's common shares is highly volatile, influenced by clinical trial outcomes, regulatory approvals, and general economic/market conditions (e.g., coronavirus outbreak)[395][396] - Lineage does not pay cash dividends, as earnings are anticipated to finance business growth, making it unsuitable for investors seeking dividend income[397] - Directors, executive officers, and their affiliates owned approximately 28% of outstanding common shares as of December 31, 2019, giving them substantial influence over shareholder-approved matters[398] - Activist shareholder campaigns could adversely affect operating results, financial condition, and stock price by diverting management attention and creating uncertainty[399] - Future issuance of additional common or preferred shares by Lineage or its subsidiaries could dilute existing shareholders' ownership interests[402][403][405] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item is not applicable to Lineage Cell Therapeutics, Inc. for the reporting period - This item is not applicable[406] Item 3. Default Upon Senior Securities Lineage Cell Therapeutics, Inc. reported no default upon senior securities for the reporting period - No default upon senior securities[407] Item 4. Mine Safety Disclosures This item is not applicable to Lineage Cell Therapeutics, Inc. for the reporting period - This item is not applicable[408] Item 5. Other Information This item is not applicable to Lineage Cell Therapeutics, Inc. for the reporting period - This item is not applicable[409] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate organizational documents and certifications from the CEO and CFO - The exhibits include Restated Articles of Incorporation, Amended and Restated Bylaws, and certifications from the CEO and CFO[410] - Interactive Data Files (XBRL Instance Document, Taxonomy Extension Schema, Calculation Linkbase, Definition Document, Label Linkbase, Presentation Linkbase) are filed herewith[410]