NOTES
TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
1.
Organization and Business Overview
Lineage
is a clinical-stage biotechnology company developing novel cell therapies for unmet medical needs. Lineage’s 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 its proprietary cell-based therapy
platform and associated development and manufacturing capabilities. From this platform Lineage develops and manufactures specialized,
terminally differentiated human cells from its pluripotent and progenitor cell starting materials. 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 administered as a means of helping the body mount an effective immune response to cancer.
Lineage
has 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
(“SCI”). This clinical trial has been partially funded by the California Institute for Regenerative Medicine.
|
|
|
|
|
●
|
VAC2,
a 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.
Asterias
Merger
On
November 7, 2018, Lineage, Asterias Biotherapeutics, Inc. (“Asterias”) and Patrick Merger Sub, Inc., a wholly owned
subsidiary of Lineage, entered into an Agreement and Plan of Merger (the “Merger Agreement”) whereby Lineage agreed
to acquire all of the outstanding common stock of Asterias in a stock-for-stock transaction (the “Asterias Merger”).
On
March 7, 2019, the shareholders of each of Lineage and Asterias approved the Merger Agreement. Prior to the Asterias Merger, Lineage
owned approximately 38% of Asterias’ issued and outstanding common stock and accounted for Asterias as an equity method
investment.
On
March 8, 2019, the Asterias Merger closed with Asterias surviving as a wholly owned subsidiary of Lineage. The former stockholders
of Asterias (other than Lineage) received 0.71 common shares of Lineage for every share of Asterias common stock they owned. Lineage
issued 24,695,898 common shares, including 58,085 shares issued in respect of restricted stock units issued by Asterias that immediately
vested in connection with the closing of the Asterias Merger. The aggregate dollar value of such shares, based on the closing
price of Lineage common shares on March 8, 2019, was $32.4 million. Lineage also assumed warrants to purchase shares of Asterias
common stock.
The
Asterias Merger has been accounted for using the acquisition method of accounting in accordance with Accounting Standards Codification
(“ASC”) Topic 805, Business Combinations, which requires, among other things, that the assets and liabilities
assumed be recognized at their fair values as of the acquisition date.
See
Note 3 for a full discussion of the Asterias Merger.
Investment
in OncoCyte
Lineage
has significant equity holdings in OncoCyte Corporation (“OncoCyte”), a publicly traded molecular diagnostic company
(NYSE American: OCX), which Lineage founded and, in the past, was a majority-owned consolidated subsidiary until February 17,
2017, when Lineage deconsolidated OncoCyte’s financial statements. OncoCyte is focused on developing and commercializing
laboratory-developed tests to serve unmet medical needs across the cancer care continuum. As of September 30, 2020, Lineage owned
approximately 3.6 million shares of OncoCyte common stock, or 5.4% of its outstanding shares (see Note 4).
2.
Basis of Presentation, Liquidity and Summary of Significant Accounting Policies
The
unaudited condensed consolidated interim financial statements presented herein, and discussed below, have been prepared in accordance
with GAAP for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. In accordance
with those rules and regulations certain information and footnote disclosures normally included in comprehensive consolidated
financial statements have been condensed or omitted. The condensed consolidated balance sheet as of December 31, 2019 was derived
from the audited consolidated financial statements at that date, but does not include all the information and footnotes required
by GAAP. These condensed consolidated interim financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in Lineage’s Annual Report on Form 10-K for the year ended December 31,
2019.
The
accompanying condensed consolidated interim financial statements, in the opinion of management, include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of Lineage’s financial condition and results of
operations. The condensed consolidated results of operations are not necessarily indicative of the results to be expected for
any other interim period or for the entire year.
Principles
of consolidation
Lineage’s
condensed consolidated interim financial statements include the accounts of its subsidiaries. All material intercompany accounts
and transactions have been eliminated in consolidation. The following table reflects Lineage’s ownership, directly or
through one or more subsidiaries, of the outstanding shares of its operating subsidiaries as of September 30, 2020.
Schedule of Lineage's Ownership of Outstanding Shares of its Subsidiaries
Subsidiary
|
|
Field
of Business
|
|
Lineage
Ownership
|
|
|
Country
|
Asterias
BioTherapeutics, Inc.
|
|
Cell
therapy clinical development programs in spinal cord injury and oncology
|
|
|
100
|
%
|
|
USA
|
Cell
Cure Neurosciences Ltd. (“Cell Cure”)
|
|
Products
to treat age-related macular degeneration
|
|
|
99
|
%
(1)
|
|
Israel
|
ES
Cell International Pte. Ltd. (“ESI”)
|
|
Stem
cell products for research, including clinical grade cell lines produced under cGMP
|
|
|
100
|
%
|
|
Singapore
|
OrthoCyte
Corporation
|
|
Developing
bone grafting products for orthopedic diseases and injuries
|
|
|
99.8
|
%
|
|
USA
|
(1)
|
Includes
shares owned by Lineage and ESI.
|
As of September 30, 2020, Lineage consolidated
its direct and indirect wholly owned or majority-owned subsidiaries because Lineage has the ability to control their operating
and financial decisions and policies through its ownership, and the noncontrolling interest is reflected as a separate element
of shareholders’ equity on Lineage’s consolidated balance sheets.
Liquidity
Since
inception, Lineage has incurred significant operating losses and has funded its operations primarily through sale of common stock
of AgeX Therapeutics, Inc. (“AgeX”) and OncoCyte, both former subsidiaries, sale of common stock of Hadasit Bio-Holdings
(“HBL”), receipt of research grants, royalties from product sales, license revenues, sales of research products and
issuance of equity securities.
On
May 1, 2020, Lineage entered into a Controlled Equity OfferingSM Sales Agreement (the “Sales Agreement”)
with Cantor Fitzgerald & Co., as sales agent (“Cantor Fitzgerald”), pursuant to which Lineage may, but is not
obligated to, raise up to $25.0
million through the sale
of common shares from time to time in at-the-market transactions under the Sales Agreement. As of September 30, 2020, no sales
had been made under the Sales Agreement.
At
September 30, 2020, Lineage had an accumulated deficit of approximately $296.1
million, working capital of $32.0
million and shareholders’ equity
of $90.2
million. Lineage has evaluated
its projected cash flows and believes that its $38.0
million of cash, cash equivalents and marketable
equity securities are sufficient to fund Lineage’s planned operations for at least the next twelve months from the issuance
date of the condensed consolidated financial statements included herein. If Lineage needs near term working capital or liquidity
to supplement its cash and cash equivalents for its operations, Lineage may sell some, or all, of its marketable equity securities,
as necessary.
On
March 8, 2019, Asterias became Lineage’s wholly owned subsidiary, and Lineage began consolidating Asterias’ operations
and results with its operations and results (see Note 3). Lineage has made extensive reductions in headcount and reduced non-clinical
related spend, in each case, as compared to Asterias’ operations before the Asterias Merger.
Lineage’s
projected cash flows are subject to various risks and uncertainties, and the unavailability or inadequacy of financing to meet
future capital needs could force Lineage to modify, curtail, delay, or suspend some or all aspects of its planned operations.
Lineage’s determination as to when it will seek new financing and the amount of financing that it will need will be based
on Lineage’s evaluation of the progress it makes in its 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. Lineage’s 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. Lineage may be required to delay, postpone, or cancel clinical trials or limit the
number of clinical trial sites, unless it is able to obtain adequate financing. In addition, Lineage has incurred significant
costs in connection with the acquisition of Asterias and with integrating its operations. Lineage may incur additional costs to
maintain employee morale and to retain key employees. Lineage cannot assure that adequate financing will be available on favorable
terms, if at all. Sales of additional equity securities by Lineage or its subsidiaries and affiliates could result in the dilution
of the interests of current shareholders.
Business
Combinations
Lineage
accounts for business combinations, such as the Asterias Merger completed in March 2019, in accordance with ASC Topic 805, which
requires the purchase price to be measured at fair value. When the purchase consideration consists entirely of Lineage common
shares, Lineage calculates the purchase price by determining the fair value, as of the acquisition date, of shares issued in connection
with the closing of the acquisition. Lineage recognizes 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
records as goodwill any amount of the fair value of the tangible and intangible assets acquired and liabilities assumed in excess
of the purchase price.
Marketable
Equity Securities
Lineage
accounts for the shares it holds in OncoCyte, AgeX and HBL as marketable equity securities in accordance with ASC 320-10-25, Investments
– Debt and Equity Securities, as amended by Accounting Standards Update (“ASU”) 2016-01, Financial Instruments–Overall:
Recognition and Measurement of Financial Assets and Financial Liabilities, further discussed below.
The
OncoCyte and AgeX shares have readily determinable fair values quoted on the NYSE American under trading symbols “OCX”
and “AGE”. The HBL shares have a readily determinable fair value quoted on the Tel Aviv Stock Exchange (“TASE”)
under trading symbol “HDST” where share prices are denominated in New Israeli Shekels (NIS).
Prior
to September 11, 2019, Lineage accounted for its OncoCyte shares held at fair value, using the equity method of accounting. On
September 11, 2019, Lineage’s ownership percentage decreased from 24% to 16% when it sold 4.0 million shares of OncoCyte
common stock. Accordingly, as the ownership percentage was reduced to less than 20%, Lineage is no longer considered to exercise
significant influence over OncoCyte and is now accounting for its OncoCyte holdings as marketable equity securities. Prior to
the Asterias Merger completed on March 8, 2019, Lineage accounted for its Asterias shares held at fair value, using the equity
method of accounting.
Revenue
Recognition
Lineage
recognizes revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”)
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.
Lineage’s
largest source of revenue is currently related to government grants. In applying the provisions of ASU 2014-09, Lineage has determined
that government grants are out of the scope of ASU 2014-09 because the government entities do not meet the definition of a “customer,”
as defined by ASU 2014-09, as there is not considered to be a transfer of control of good or services to the government entities
funding the grant. Lineage has, and will continue to, account for grants received to perform research and development services
in accordance with ASC 730-20, Research and Development Arrangements, which requires an assessment, at the inception of
the grant, of whether the grant is a liability or a contract to perform research and development services for others. If Lineage
or a subsidiary receiving the grant is obligated to repay the grant funds to the grantor regardless of the outcome of the research
and development activities, then Lineage is required to estimate and recognize that liability. Alternatively, if Lineage or a
subsidiary receiving the grant is not required to repay, or if it is required to repay the grant funds only if the research and
development activities are successful, then the grant agreement is accounted for as a contract to perform research and development
services for others, in which case, grant revenue is recognized when the related research and development expenses are incurred
(see Note 15).
Deferred
grant revenues represent grant funds received from the governmental funding agencies for which the allowable expenses have not
yet been incurred as of the balance sheet date reported. As of September 30, 2020, deferred grant revenue was $46,000.
Basic
and diluted net income (loss) per share attributable to common shareholders
Basic
earnings per share is calculated by dividing net income or loss attributable to Lineage common shareholders by the weighted average
number of common shares outstanding, net of unvested restricted stock or restricted stock units, subject to repurchase by Lineage,
if any, during the period. Diluted earnings per share is calculated by dividing the net income or loss attributable to Lineage
common shareholders by the weighted average number of common shares outstanding, adjusted for the effects of potentially dilutive
common shares issuable under outstanding stock options and warrants, using the treasury-stock method, convertible preferred stock,
if any, using the if-converted method, and treasury stock held by subsidiaries, if any.
For
the three and nine months ended September 30, 2020 and 2019, respectively, Lineage reported a net loss attributable to common
shareholders, and therefore, all potentially dilutive common shares were considered antidilutive for those periods.
The
following weighted average common share equivalents were excluded from the computation of diluted net income (loss) per common
share for the periods presented because including them would have been antidilutive (in thousands):
Schedule
of Antidilutive Securities Excluded from Computation of Earnings Per Share
|
|
Three
Months Ended
September
30,
(unaudited)
|
|
|
Nine
Months Ended
September
30,
(unaudited)
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Stock options
|
|
|
17,058
|
|
|
|
15,941
|
|
|
|
16,391
|
|
|
|
15,332
|
|
Lineage Warrants (1)
(Note 3)
|
|
|
1,090
|
|
|
|
1,090
|
|
|
|
1,090
|
|
|
|
975
|
|
Restricted stock units
|
|
|
123
|
|
|
|
236
|
|
|
|
141
|
|
|
|
277
|
|
(1)
|
Although
the Lineage Warrants are classified as liabilities, these warrants are considered for dilutive earnings per share calculations
in accordance with ASC 260, Earnings Per Share, and determined to be anti-dilutive for the period presented.
|
Restricted
Cash
In
accordance with ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, Lineage explains the change during the
period in the total of cash, cash equivalents and restricted cash, and includes restricted cash with cash and cash equivalents
when reconciling the beginning-of-period and end-of-period total amounts shown on the condensed consolidated statements of cash
flows.
The
following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated
balance sheet dates that comprise the total of the same such amounts shown in the condensed consolidated statements of cash flows
for all periods presented herein (in thousands):
Schedule of Reconciliation of Cash, Cash Equivalents, and Restricted Cash
|
|
September
30,
2020
|
|
|
December
31,
2019
|
|
|
|
(unaudited)
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
32,565
|
|
|
$
|
9,497
|
|
Restricted
cash included in deposits and other long-term assets (see Note 15)
|
|
|
570
|
|
|
|
599
|
|
Total
cash, cash equivalents, and restricted cash as shown in the condensed consolidated statements of cash flows
|
|
$
|
33,135
|
|
|
$
|
10,096
|
|
Lease
accounting and impact of adoption of the new lease standard
On
January 1, 2019, Lineage adopted ASU 2016-02, Leases (Topic 842, “ASC 842”) and its subsequent amendments affecting
Lineage: (i) ASU 2018-10, Codification Improvements to Topic 842, Leases; and (ii) ASU 2018-11, Leases (Topic 842):
Targeted improvements, using the modified retrospective method.
Lineage
management determines 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. When determining whether
a lease is a finance lease or an operating lease, ASC 842 does not specifically define criteria to determine “major part
of remaining economic life of the underlying asset” and “substantially all of the fair value of the underlying asset.”
For lease classification determination, Lineage continues to use: (i) greater than or equal to 75% to determine whether the lease
term is a major part of the remaining economic life of the underlying asset; and (ii) greater than or equal to 90% to determine
whether the present value of the sum of lease payments is substantially all of the fair value of the underlying asset. Under the
available practical expedients, Lineage accounts for the lease and non-lease components as a single lease component. Lineage recognizes
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 Lineage’s right to use an underlying asset during the lease term and lease liabilities represent Lineage’s
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 Lineage’s leases do not provide an implicit
rate, Lineage uses its incremental borrowing rate based on the information available at commencement date in determining the present
value of lease payments. Lineage uses the implicit rate when readily determinable. The operating lease ROU asset also includes
any lease payments made and excludes lease incentives. Lineage’s lease terms may include options to extend or terminate
the lease when it is reasonably certain that Lineage 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 (see Note 6), 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 Lineage’s condensed consolidated balance sheets.
In
connection with the adoption on ASC 842 on January 1, 2019, Lineage derecognized net book value of leasehold improvements and
corresponding lease liabilities of $1.9 million and $2.0 million, respectively, which was the carrying value of certain operating
leases as of December 31, 2018, included in property and equipment and lease liabilities, respectively, recorded pursuant to build
to suit lease accounting under the previous ASC 840 lease standard. The derecognition of these amounts from the superseded ASC
840 lease standard was offset by a cumulative effect adjustment of $0.1 million as a reduction of Lineage’s accumulated
deficit on January 1, 2019. These build to suit leases were primarily related to Lineage’s prior leases in Alameda, California
and Cell Cure’s leases in Jerusalem, Israel (See Note 15). ASC 842 requires build to suit leases recognized on Lineage’s
consolidated balance sheets as of December 31, 2018 to be derecognized upon the adoption of the new lease standard and be recognized
in accordance with the new standard on January 1, 2019.
The
adoption of ASC 842 had a material impact in Lineage’s consolidated balance sheets, with the most significant impact resulting
from the recognition of ROU assets and lease liabilities for operating leases with remaining terms greater than twelve months
on the adoption date. Lineage’s accounting for financing leases (previously referred to as “capital leases”)
remained substantially unchanged (see Note 15).
Recently
Adopted Accounting Pronouncements
In
August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure
Requirements for Fair Value Measurement, which modifies certain disclosure requirements for reporting fair value measurements.
ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Lineage
adopted this standard on January 1, 2020 and it did not have a significant impact on our consolidated financial statements.
Recently
Issued Accounting Pronouncements Not Yet Adopted - The recently issued accounting pronouncements applicable to Lineage that
are not yet effective should be read in conjunction with the recently issued accounting pronouncements, as applicable and disclosed
in Lineage’s Annual Report on Form 10-K for the year ended December 31, 2019.
In
December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. The ASU enhances and simplifies
various aspects of the income tax accounting guidance in ASC 740 and removes certain exceptions for recognizing deferred taxes
for investments, performing intraperiod allocation and calculating income taxes in interim periods. The ASU also adds guidance
to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of
a consolidated group. This ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within those
fiscal years with early adoption permitted. Lineage is currently evaluating the impact the adoption of this guidance may have
on its consolidated financial statements.
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments. ASU 2016-13 is intended to provide financial statement users with more decision-useful information
about the expected credit losses on financial instruments and other commitments and requires consideration of a broader range
of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for Lineage beginning January
1, 2023. Lineage has not yet completed its assessment of the impact of the new standard on its consolidated financial statements.
3.
Asterias Merger
On
March 8, 2019, the Asterias Merger closed with Asterias surviving as a wholly owned subsidiary of Lineage. The former stockholders
of Asterias (other than Lineage) received 0.71 common shares of Lineage (the “Merger Consideration”) for every share
of Asterias common stock they owned (the “Merger Exchange Ratio”). Lineage issued 24,695,898 common shares, including
58,085 shares issued in respect of restricted stock units issued by Asterias that immediately vested in connection with the closing
of the Asterias Merger. The fair value of such shares, based on the closing price of Lineage common shares on March 8, 2019, was
$32.4 million.
In
connection with the closing of the Asterias Merger, Lineage assumed outstanding warrants to purchase shares of Asterias common
stock, as further discussed below and in Note 11, and assumed sponsorship of the Asterias 2013 Equity Incentive Plan (see Note
12). All stock options to purchase shares of Asterias common stock outstanding immediately prior to the closing of the Asterias
Merger were canceled at the closing for no consideration.
As
of March 8, 2019, the assets and liabilities of Asterias have been included in the condensed consolidated balance sheet of Lineage.
The results of operations of Asterias from March 8, 2019 through December 31, 2019 have been included in the condensed consolidated
statement of operations of Lineage for the year ended December 31, 2019.
Calculation
of the purchase price
Schedule of Merger
Consideration Transferred
The
calculation of the purchase price for the Asterias Merger and the Merger Consideration transferred on March 8, 2019 was as follows
(in thousands, except for share and per share amounts):
|
|
Lineage
(38% ownership interest)
|
|
|
Shareholders
other than Lineage (approximate 62% ownership interest)
|
|
|
Total
|
|
Outstanding
Asterias common stock as of March 8, 2019
|
|
|
21,747,569
|
|
|
|
34,783,333
|
(1)
|
|
|
56,530,902
|
(1)
|
Exchange
ratio
|
|
|
0.710
|
|
|
|
0.710
|
|
|
|
0.710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lineage
common shares issuable
|
|
|
15,440,774
|
(2)
|
|
|
24,695,898
|
(3)
|
|
|
40,136,672
|
|
Per
share price of Lineage common shares as of March 8, 2019
|
|
$
|
1.31
|
|
|
$
|
1.31
|
|
|
$
|
1.31
|
|
Purchase
price (in thousands)
|
|
$
|
20,227
|
(2)
|
|
$
|
32,353
|
|
|
$
|
52,580
|
|
(1)
|
Includes
81,810 shares of Asterias restricted stock unit awards that immediately vested on March 8, 2019 and converted into the right
to receive common shares of Lineage based on the Merger Exchange Ratio, resulting in 58,085 common shares of Lineage issued
on March 8, 2019 as part of the Merger Consideration. These restricted stock units were principally attributable to pre-combination
services and included as part of the purchase price in accordance with ASC 805. See Note 12 for Asterias restricted stock
units that vested on the closing of the Asterias Merger attributable to post-combination services that were recorded outside
of the purchase price as an immediate charge to stock-based compensation expense.
|
|
|
(2)
|
Estimated
fair value for Lineage’s previously held 38% ownership interest in Asterias common stock is part of the total purchase
price of Asterias for purposes of the purchase price allocation under ASC 805 and for Lineage’s adjustment of its 38%
interest to fair value at the effective date of the Asterias Merger and immediately preceding the consolidation of Asterias’
results with Lineage. No actual common shares of Lineage were issued to Lineage in connection with the Asterias Merger.
|
|
|
(3)
|
Net
of a de minimis number of fractional shares which were paid in cash.
|
Purchase
price allocation
Lineage
allocated the acquisition consideration to tangible and identifiable intangible assets acquired and liabilities assumed based
on their estimated fair values as of the acquisition date. The fair value of the acquired tangible and identifiable intangible
assets were determined based on inputs that are unobservable and significant to the overall fair value measurement. It is also
based on estimates and assumptions made by management at the time of the acquisition. As such, this was classified as Level 3
fair value hierarchy measurements and disclosures.
The
allocation of the purchase price in the table below is based on our estimates of the fair values of tangible and intangible assets
acquired, including IPR&D, and liabilities assumed as of the acquisition date, with the excess recorded as goodwill (in thousands).
As of December 31, 2019, Lineage had finalized its purchase price allocation.
Schedule of Identifiable Tangible and Intangible Assets Acquired and Liabilities Assumed
Assets
acquired:
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,117
|
|
Prepaid
expenses and other assets, current and noncurrent
|
|
|
660
|
|
Machinery
and equipment
|
|
|
308
|
|
Long-lived
intangible assets - royalty contracts
|
|
|
650
|
|
Acquired
in-process research and development (“IPR&D”)
|
|
|
46,540
|
|
|
|
|
|
|
Total
assets acquired
|
|
|
51,275
|
|
Liabilities
assumed:
|
|
|
|
|
Accrued
liabilities and accounts payable
|
|
|
982
|
|
Liability
classified warrants
|
|
|
867
|
|
Deferred
license revenue
|
|
|
200
|
|
Long-term
deferred income tax liability
|
|
|
10,753
|
|
|
|
|
|
|
Total
liabilities assumed
|
|
|
12,802
|
|
|
|
|
|
|
Net
assets acquired, excluding goodwill (a)
|
|
|
38,473
|
|
|
|
|
|
|
Fair
value of Lineage common shares held by Asterias (b)
|
|
|
3,435
|
|
|
|
|
|
|
Total
purchase price (c)
|
|
|
52,580
|
|
|
|
|
|
|
Estimated
goodwill (c-a-b)
|
|
$
|
10,672
|
|
The
valuation of identifiable intangible assets and their estimated useful lives are as follows (in thousands, except for useful life):
Schedule of Valuation of Identifiable Intangible Assets and Their Estimated Useful Lives
|
|
Asset
Fair
Value
|
|
|
Useful
Life
(Years)
|
|
|
|
(in
thousands, except for useful life)
|
|
In
process research and development (“IPR&D”)
|
|
$
|
46,540
|
|
|
|
n/a
|
|
Royalty
contracts
|
|
|
650
|
|
|
|
5
|
|
|
|
$
|
47,190
|
|
|
|
|
|
The
following is a discussion of the valuation methods used to determine the fair value of Asterias’ significant assets and
liabilities in connection with the Asterias Merger:
IPR&D
and Deferred Income Tax Liability - The fair value of identifiable acquired IPR&D intangible assets consisting of $31.7
million pertaining to the OPC1 program that is currently in a Phase 1/2a clinical trial for SCI, which has been partially funded
by the California Institute for Regenerative Medicine and $14.8 million pertaining to the VAC2 program, which is an allogeneic,
or “off-the-shelf,” cancer immunotherapy derived from pluripotent stem cells for which a clinical trial in non-small
cell lung cancer is being funded and sponsored by Cancer Research UK. The identification of these intangible assets are based
on consideration of historical experience and a market participant’s view further discussed below; collectively, OPC1 and
VAC2 are referred to as the “AST-Clinical Programs”. These intangible assets are valued primarily through the use
of a probability weighted discounted cash flow method under the income approach further discussed below. Lineage considered Asterias’
VAC1 program, which is an autologous, or patient-specific, cancer immunotherapy derived from the patient’s own cells, to
have de minimis value due to significant risks, substantial costs and limited opportunities.
Lineage
determined that the estimated aggregate fair value of the AST-Clinical programs was $46.5 million as of the acquisition date using
a probability weighted discounted cash flow method for each respective program. This approach estimates the probability of the
AST-Clinical Programs achieving successful completion of remaining clinical trials and related approvals into the valuation technique.
To
calculate fair value of the AST-Clinical programs under the discounted cash flow method, Lineage used probability-weighted, projected
cash flows discounted at a rate considered appropriate given the significant inherent risks associated with cell therapy development
by clinical-stage companies. Cash flows were calculated based on estimated projections of revenues and expenses related to each
respective program. Cash flows were assumed to extend through a seven-year market exclusivity period for the OPC1 program from
the date of market launch. Revenues from commercialization of the AST-Clinical Programs were based on estimated market potential
for the indication of each program. The resultant cash flows were then discounted to present value using a weighted-average cost
of capital for companies with profiles substantially similar to that of Lineage, which Lineage believes represents the rate that
market participants would use to value the assets. Lineage compensated for the phase of development of the program by applying
a probability factor to its estimation of the expected future cash flows. The projected cash flows were based on significant assumptions,
including the indications in which Lineage will pursue development of the AST-Clinical programs, the time and resources needed
to complete the development and regulatory approval, estimates of revenue and operating profit related to the program considering
its stage of development, the life of the potential commercialized product, market penetration and competition, and risks associated
with achieving commercialization, including delay or failure to obtain regulatory approvals to conduct clinical studies, failure
of clinical studies, delay or failure to obtain required market clearances, and intellectual property litigation.
These
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 Lineage becomes aware
of an event or a change in circumstances that would indicate the asset may be impaired.
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 (“DTL”) in accordance
with ASC 740, Income Taxes (see Note 13). This DTL is computed using the fair value of the IPR&D assets on the acquisition
date multiplied by Lineage’s 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 closing of the Asterias Merger, which may be considered for reversal
under ASC 740 as further discussed in Note 13.
Royalty
contracts - Asterias has certain royalty revenues for “research only use” culture media for pre-clinical research
applications under certain, specific patent families under contracts which preclude the customers to sell for commercial use or
for clinical trials. These royalty cash flows are generated under certain specific patent families that Asterias previously acquired
from Geron Corporation (“Geron”). Asterias pays Geron a royalty for all royalty revenues received from these contracts.
Because these patents are a subset of the clinical programs discussed above, are expected to continue to generate revenues for
Asterias and are not to be used in the OPC1 or the VAC2 programs, these patents are considered to be separate long-lived intangible
assets under ASC 805. These intangible assets are also valued primarily through the use of the discounted cash flow method under
the income approach, and will be amortized over their useful life, estimated to be five years. The discounted cash flow method
estimated the amount of net royalty income that can be expected under the contracts in future years. The amounts were based on
observed historical trends in the growth of these revenue streams, and were estimated to terminate in approximately five years,
when the key patents under these contracts will begin to expire. The resulting cash flows were discounted to the valuation date
based on a rate of return that recognizes a lower level of risk associated with these assets as compared to the AST-Clinical programs
discussed above.
Deferred
license revenue - In September 2018, Asterias and Novo Nordisk A/S (“Novo Nordisk”) entered into an option for
Novo Nordisk or its designated U.S. affiliate to license, on a non-exclusive basis, certain intellectual property related to culturing
pluripotent stem cells, such as hES cells, in suspension. Under the terms of the option, Asterias received a one-time upfront
payment of $1.0 million, in exchange for a 24-month period option to negotiate a non-exclusive license during which time Asterias
has agreed to not grant any exclusive licenses inconsistent with the Novo Nordisk option. This option was considered a performance
obligation as it provided Novo Nordisk with a material right that it would not receive without entering into the contract.
For
business combination purposes under ASC 805, the fair value of this performance obligation to Lineage, from a market participant
perspective, was the estimated costs Lineage may incur, plus a normal profit margin for the level of effort required to perform
under the contract after the acquisition date, assuming Novo Nordisk exercised its option, including negotiation costs, legal
fees, arbitration, if any, and other related costs. Management estimated those costs, plus a normal profit margin, to be approximately
$200,000 in the purchase price allocation. This amount was originally recorded as deferred revenue and subsequently recognized
as revenue in September 2020 when Novo Nordisk did not exercise the option.
Liability
classified warrants - On May 13, 2016, in connection with a common stock offering, Asterias issued warrants to purchase 2,959,559
shares of Asterias common stock (the “Asterias Warrants”) with an exercise price of $4.37 per share that expire on
May 13, 2021. As of the closing of the Asterias Merger, there were 2,813,159 Asterias Warrants outstanding. The Asterias Warrants
contain certain provisions in the event of a Fundamental Transaction, as defined in the warrant agreement governing the Asterias
Warrants (“Warrant Agreement”), that Asterias or any successor entity will be required to purchase, at a holder’s
option, exercisable at any time concurrently with or within thirty days after the consummation of the Fundamental Transaction,
the Asterias Warrants for cash in an amount equal to the calculated value of the unexercised portion of such holder’s warrants,
determined in accordance with the Black-Scholes option pricing model with significant inputs as specified in the Warrant Agreement.
The Asterias Merger was a Fundamental Transaction for purposes of the Asterias Warrants.
The
fair value of the Asterias Warrants was determined by using Black-Scholes option pricing models which take into consideration
the probability of the Fundamental Transaction, which for purposes of the above valuation was assumed to be at 100%
and net cash settlement occurring, using
the contractual remaining term of the warrants. In applying these models, these inputs included key assumptions including the
per share closing price of Lineage common shares on March 8, 2019, volatility computed in accordance with the provisions of the
Warrant Agreement and, to a large extent, assumptions based on discussions with a majority of the holders of the Asterias Warrants
since the closing of the Asterias Merger to settle the Asterias Warrants in cash or in common shares of Lineage. Based on such
discussions, Lineage believes the fair value of the Asterias Warrants as of the closing of the Asterias Merger is not subject
to change significantly, however, to the extent any Asterias Warrants that were not settled in cash or in Lineage common shares
discussed below, were automatically converted to Lineage warrants 30 days after the closing of the Asterias Merger. In April 2019,
Asterias Warrants representing approximately $372,000
in fair value were settled: $332,000
in fair value was settled in exchange for 251,835
common shares of Lineage, and $40,000 in fair value was settled in exchange for cash. The Asterias Warrants settled in exchange
for common shares of Lineage were held by Broadwood Partners, L.P., an Asterias and Lineage shareholder. The Asterias Warrants
settled in exchange for cash were held by other parties. The remaining Asterias Warrants (representing approximately $495,000
in fair value as of March 31, 2019) were converted into warrants to purchase common shares of Lineage using the Merger
Exchange Ratio (the “Lineage Warrants”).
As
of September 30, 2020, the total number of common shares of Lineage subject to warrants that were assumed by Lineage in connection
with the Asterias Merger was 1,089,900, with similar terms and conditions retained under the Lineage Warrants as per the original
Warrant Agreements. The Lineage Warrants have an exercise price of $6.15 per warrant share and expire on May 13, 2021.
Fair
value of Lineage common shares held by Asterias - As of March 8, 2019, Asterias held 2,621,811 common shares of Lineage as
marketable securities on its standalone financial statements. The fair value of those shares acquired by Lineage from Asterias
is determined based on the $1.31 per share closing price of Lineage common shares on March 8, 2019. Although treasury shares are
not considered an asset and were retired upon Lineage’s acquisition of Asterias, the fair value of those shares is a part
of the purchase price allocation shown in the tables above. These Lineage shares were retired at the completion of the Asterias
Merger.
Goodwill
- 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.
Depending
on the structure of a particular acquisition, goodwill and identifiable intangible assets may not be deductible for tax purposes.
Goodwill recorded in the Asterias Merger is not expected to be deductible for tax purposes (see Note 13).
Acquisition
related costs recorded in general and administrative expenses for the three months ended September 30, 2020 and 2019 were immaterial.
Acquisition related costs recorded in general and administrative expenses were $0.7 million and $4.4 million for the nine months
ended September 30, 2020 and 2019, respectively.
Prior
to the consummation of the Asterias Merger in March 2019, Lineage elected to account for its 21.7 million shares of Asterias common
stock at fair value using the equity method of accounting. The fair value of the 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: (a)
$1.31, the closing price of Lineage common shares on such date; by (b) the Merger Exchange Ratio. The fair value of the 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, Lineage 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. All share prices were determined based
on the closing price of Lineage or Asterias common stock on the NYSE American on the applicable dates.
Asterias
Merger Related Litigation - See Note 15 Commitments and Contingencies for discussion regarding litigation related to the Asterias
Merger.
4.
Accounting for Common Stock of OncoCyte, at Fair Value
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. The calculation of fair value is the same under the equity method and as a marketable equity security.
As
of December 31, 2019, Lineage owned approximately 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 of $2.25 per share on December 31, 2019. During the nine months ended September
30, 2020, Lineage sold approximately 4.8 million shares of OncoCyte common stock for net proceeds of $10.9 million.
As
of September 30, 2020, Lineage owned approximately 3.6 million shares of OncoCyte common stock, or 5.4%, which had a fair value
of approximately $5.0 million, based on the closing price of OncoCyte 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 remaining shares
owned by Lineage 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.
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.
5.
Sale of Significant Ownership Interest in AgeX to Juvenescence Limited
On
August 30, 2018, Lineage entered into a Stock Purchase Agreement with Juvenescence Limited and AgeX, pursuant to which Lineage
sold 14.4 million shares of common stock of AgeX to Juvenescence for $3.00 per share, or an aggregate purchase price of $43.2
million (the “Purchase Price”). Juvenescence paid $10.8 million of the Purchase Price at closing, issued an unsecured
convertible promissory note dated August 30, 2018 in favor of Lineage for $21.6 million (the “Promissory Note”), and
paid $10.8 million on November 2, 2018. The Stock Purchase Agreement contains customary representations, warranties and indemnities
from Lineage relating to the business of AgeX, including an indemnity cap of $4.3 million, which is subject to certain exceptions.
In connection with the sale, Lineage also entered into a Shared Facilities Agreement with AgeX (see Note 10).
The
Promissory Note bore interest at 7% per annum, with principal and accrued interest payable at maturity on August 30, 2020. The
Promissory Note was paid in full on August 28, 2020.
For
the three and nine months ended September 30, 2020, Lineage recognized $252,000 and $1,008,000, respectively, in interest income
on the Promissory Note.
The
Shared Facilities Agreement was terminated on July 31, 2019 with respect to the use of Lineage’s office and laboratory facilities
and September 30, 2019 with respect to all other remaining shared services.
6.
Property and Equipment, Net
At
September 30, 2020 and December 31, 2019, property and equipment was comprised of the following (in thousands):
Schedule of Property and Equipment, Net
|
|
September
30,
2020
|
|
|
December
31,
2019
|
|
|
|
(unaudited)
|
|
|
|
|
Equipment,
furniture and fixtures
|
|
$
|
4,084
|
|
|
$
|
4,148
|
|
Leasehold
improvements
|
|
|
2,863
|
|
|
|
2,862
|
|
Right-of-use
assets (1)
|
|
|
3,992
|
|
|
|
5,756
|
|
Accumulated
depreciation and amortization
|
|
|
(6,090
|
)
|
|
|
(4,591
|
)
|
Property
and equipment, net
|
|
$
|
4,849
|
|
|
$
|
8,175
|
|
(1)
|
Lineage
adopted ASC 842 on January 1, 2019. For additional information on this standard and right-of-use assets and liabilities (see
Notes 2 and 15).
|
Property
and equipment at September 30, 2020 and December 31, 2019 includes $80,000 and $96,000 in financing leases, respectively. In September
2020, Lineage terminated its leases in Alameda and entered into a new lease for a reduced amount of square footage. This resulted
in a reduction to right-of-use assets of approximately $1.8 million. See additional information in Note 15.
Depreciation
and amortization expense amounted to $200,000
and $253,000
for the three months ended September 30, 2020 and 2019, and $623,000
and $766,000
for the nine months ended September 30, 2020 and 2019, respectively. During the three and nine months ended September 30, 2020,
Lineage sold equipment with net book values of $39,000
and $52,000,
respectively, and recognized losses of $32,000
and $34,000,
respectively. Additionally, Lineage sold non-capitalized assets
for a net gain of $67,000.
Both the gain and losses are included in research and development expenses on the statement of operations.
7.
Goodwill and Intangible Assets, Net
At
September 30, 2020 and December 31, 2019, goodwill and intangible assets, net consisted of the following (in thousands):
Schedule
of Goodwill and Intangible Assets, Net
|
|
September
30, 2020
|
|
|
December
31, 2019
|
|
|
|
(unaudited)
|
|
|
|
|
Goodwill(1)
|
|
$
|
10,672
|
|
|
$
|
10,672
|
|
|
|
|
|
|
|
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
Acquired IPR&D - OPC1 (from the Asterias Merger)(2)
|
|
$
|
31,700
|
|
|
$
|
31,700
|
|
Acquired IPR&D - VAC2 (from the Asterias Merger)(2)
|
|
|
14,840
|
|
|
|
14,840
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
Acquired patents
|
|
|
18,953
|
|
|
|
18,953
|
|
Acquired royalty contracts(2)
|
|
|
650
|
|
|
|
650
|
|
Total intangible assets
|
|
|
66,143
|
|
|
|
66,143
|
|
Accumulated amortization
|
|
|
(18,976
|
)
|
|
|
(17,895
|
)
|
Intangible assets, net
|
|
$
|
47,167
|
|
|
$
|
48,248
|
|
(1)
|
Goodwill
represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired
and liabilities assumed in the Asterias Merger (see Note 3).
|
|
|
(2)
|
See
Note 3 for information on the Asterias Merger which was consummated on March 8, 2019.
|
Amortization
recognized in research and development expenses was $0.2 million and $0.5 million for the three months ended September 30, 2020
and 2019, and $1.0 million and $1.4 million for the nine months ended September 30, 2020 and 2019, respectively.
8.
Accounts Payable and Accrued Liabilities
At
September 30, 2020 and December 31, 2019, accounts payable and accrued liabilities consisted of the following (in thousands):
Schedule of Accounts Payable and Accrued Liabilities
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
|
(unaudited)
|
|
|
|
|
Accounts payable
|
|
$
|
3,155
|
|
|
$
|
2,427
|
|
Accrued compensation
|
|
|
1,504
|
|
|
|
1,549
|
|
Accrued liabilities
|
|
|
2,027
|
|
|
|
1,246
|
|
PPP loan payable
|
|
|
523
|
|
|
|
-
|
|
Other current liabilities
|
|
|
5
|
|
|
|
4
|
|
Total
|
|
$
|
7,214
|
|
|
$
|
5,226
|
|
Accounts
payable includes $0.6 million and accrued expenses includes $1.0 million for a total of $1.6 million (£1.25 million) related
to the signature fee owed to Cancer Research UK, as described in Note 15.
PPP
Loan Payable
In
April 2020, Lineage received a loan for $523,000
from Axos Bank under the PPP contained within the new Coronavirus Aid, Relief and Economic Security (“CARES”) Act.
The PPP loan has a term of two years, is unsecured, and is guaranteed by the U.S. Small Business Administration (“SBA”).
The loan carries a fixed interest rate of one percent per annum, with the first six months of interest deferred. Under the CARES
Act and Paycheck Protection Program Flexibility Act, Lineage will be eligible to apply for forgiveness of all loan proceeds
used to pay payroll costs, rent, utilities and other qualifying expenses during the 24-week period following receipt of the loan,
provided that Lineage maintains its employment and compensation within certain parameters during such period. Not more than 40%
of the forgiven amount may be for non-payroll costs. If the conditions outlined in the PPP loan program are adhered to by Lineage,
all or part of such loan could be forgiven. Lineage believes that all or a substantial portion of the PPP loan is eligible for
forgiveness within one year and classifies the loan as a short-term liability. However, Lineage
cannot provide any assurance whether the PPP loan will ultimately be forgiven by the SBA. Any forgiven amounts will not be included
in Lineage’s taxable income. Lineage applied for full forgiveness of the PPP loan on September 30, 2020.
2019
Separation Payments
In
connection with the Asterias Merger, several Asterias employees were terminated as of the Asterias Merger date. Three of these
employees had employment agreements with Asterias which entitled them to change in control and separation payments in the aggregate
of $2.0 million, which such conditions were met on the Asterias Merger date. Accordingly, $2.0 million was accrued and recorded
in general and administrative expenses on the merger date and paid in April 2019.
Additionally,
Lineage entered into a plan of termination with substantially all other previous employees of Asterias with potential separation
payments in the aggregate of $0.5 million. Termination dates for these individuals ranged from May 31, 2019 to June 28, 2019.
These employees were required to provide services related to the transition and be an employee of the combined company as of their
date of termination in order to receive separation benefits. Since the employees were required to render future services after
the merger date, Lineage recorded the aggregate liability ratably over their respective service periods from the Asterias Merger
date through the above termination dates, in accordance with ASC 420, Exit or Disposal Cost Obligations. All payments were
completed by July 31, 2019.
In
connection with the relocation of Lineage’s corporate headquarters to Carlsbad, California, discussed in Note 15, Lineage
entered into a plan of termination with certain Lineage employees with potential separation payments in the aggregate of $0.7
million. Termination dates for these individuals range from August 9, 2019 to September 30, 2019. These employees had to provide
services related to the transition of services and activities in connection with the relocation and be an employee of Lineage
as of their date of termination in order to receive separation benefits. Lineage recorded the aggregate liability ratably over
their respective service periods from June 2019 through the above termination dates, in accordance with ASC 420. As of December
31, 2019, all separation payments had been made.
9.
Fair Value Measurements
Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy
prioritizes the inputs to valuation methodologies used to measure fair value (ASC 820-10-50), Fair Value Measurements and Disclosures:
|
●
|
Level
1 – Inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.
|
|
|
|
|
●
|
Level
2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated
by observable market data for substantially the full term of the assets or liabilities.
|
|
|
|
|
●
|
Level
3 – Inputs to the valuation methodology are unobservable; that reflect management’s own assumptions about the
assumptions market participants would make and significant to the fair value.
|
We
measure cash, cash equivalents, marketable securities and our liability classified warrants at fair value on a recurring basis.
The fair values of such assets were as follows for September 30, 2020 and December 31, 2019 (in thousands):
Schedule of Fair Value of Assets and Liabilities Valued on Recurring Basis
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
Balance at September 30, 2020
|
|
|
Quoted
Prices in Active Markets for Identical Assets
(Level 1)
|
|
|
Significant Other Observable Inputs
(Level 2)
|
|
|
Significant Unobservable Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
32,565
|
|
|
$
|
32,565
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Marketable securities
|
|
|
5,481
|
|
|
|
5,481
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lineage Warrants
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
Cell Cure Warrants
|
|
|
190
|
|
|
|
-
|
|
|
|
-
|
|
|
|
190
|
|
|
|
|
|
|
Fair
Value Measurements Using
|
|
|
Balance
at December 31, 2019
|
|
|
Quoted
Prices in Active Markets for Identical Assets
(Level
1)
|
|
|
Significant
Other Observable Inputs
(Level
2)
|
|
|
Significant
Unobservable Inputs
(Level
3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
9,497
|
|
|
$
|
9,497
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Marketable
securities
|
|
|
21,219
|
|
|
|
21,219
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lineage
Warrants
|
|
|
20
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20
|
|
Cell
Cure Warrants
|
|
|
257
|
|
|
|
-
|
|
|
|
-
|
|
|
|
257
|
|
We
have not transferred any instruments between the three levels of the fair value hierarchy.
In
determining fair value, Lineage utilizes valuation techniques that maximize the use of observable inputs and minimize the use
of unobservable inputs to the extent possible, and also considers counterparty credit risk in its assessment of fair value.
Marketable
securities include our positions in OncoCyte, AgeX and HBL. All of these securities have readily determinable fair values quoted
on the NYSE American or TASE stock exchanges. These securities are measured at fair value and reported as current assets on the
consolidated balance sheets based on the closing trading price of the security as of the date being presented.
The
fair value of the Lineage Warrants is determined by using Black-Scholes option pricing models which take into consideration the
probability of a fundamental transaction, as defined in the warrant agreement, the exercise price of the warrants and the contractual
remaining term of the warrants. The Lineage Warrants have an expiration date of May 13, 2021. The Lineage Warrants are included
in current liabilities on the condensed consolidated balance sheets. Changes in the fair value of the Lineage Warrants at each
reporting period are included in the condensed consolidated statements of operations under unrealized gain on warrant liability.
For the three and nine months ended September 30, 2020, Lineage recognized unrealized gains of $13,000 and $18,000
on the Lineage Warrants, respectively, which was primarily related to the reduction in the remaining life of the warrants.
The
fair value of the Cell Cure Warrants (defined below) is determined by using Black-Scholes option pricing models which take into
consideration the fair value of the Cell Cure ordinary shares, adjusted for lack of marketability, as appropriate, the contractual
remaining term of the warrants and the expected stock price volatility over the term. The Cell Cure Warrants are included in current
(portion with terms expiring within the next twelve months) and long-term liabilities on the condensed consolidated balance sheets.
Changes in the fair value of the Cell Cure Warrants at each reporting period are included in the condensed consolidated statements
of operations under unrealized gain on warrant liability. For the three and nine months ended September 30, 2020, Lineage recognized
unrealized gains of $41,000
and $66,000
on the Cell Cure Warrants, respectively, primarily related to
the reduction in the remaining life of the warrants.
The
fair value of Lineage’s assets and liabilities, which qualify as financial instruments under FASB guidance regarding disclosures
about fair value of financial instruments, approximate the carrying amounts presented in the accompanying consolidated balance
sheets. The carrying amounts of accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses
and other current liabilities approximate fair values because of the short-term nature of these items.
10.
Related Party Transactions
Shared
Facilities and Service Agreements with Affiliates
Under
the terms of Shared Facilities Agreements, Lineage allowed OncoCyte and AgeX to use Lineage’s premises and equipment located
at Lineage’s headquarters in Alameda, California for the purpose of conducting business. Lineage also provided accounting,
billing, bookkeeping, payroll, treasury, payment of accounts payable, and other similar administrative services to OncoCyte and
AgeX. The Shared Facilities Agreements also allowed Lineage to provide the services of attorneys, accountants, and other professionals
who may provide professional services to Lineage. Lineage also provided OncoCyte and AgeX with the services of laboratory and
research personnel, including Lineage employees and contractors, for the performance of research and development work for OncoCyte
and AgeX at the premises. Shared services with AgeX were terminated on July 31, 2019 with respect to the use of Lineage’s
office and laboratory facilities and September 30, 2019 with respect to all other remaining shared services. Shared services with
OncoCyte were terminated on September 30, 2019, and December 31, 2019 with respect to all other remaining shared services.
Lineage
charged OncoCyte and AgeX a “Use Fee” for services provided and for use of Lineage facilities, equipment, and supplies.
For each billing period, Lineage prorated and allocated to OncoCyte and AgeX costs incurred, including costs for services of Lineage
employees and use of equipment, insurance, leased space, professional services, software licenses, supplies and utilities. The
allocation of costs depended on key cost drivers, including actual documented use, square footage of facilities used, time spent,
costs incurred by Lineage for OncoCyte and AgeX, or upon proportionate usage by Lineage, OncoCyte and AgeX, as reasonably estimated
by Lineage. Lineage, at its discretion, had the right to charge OncoCyte and AgeX a 5% markup on such allocated costs. The allocated
cost of Lineage employees and contractors who provided services was based upon the number of hours or estimated percentage of
efforts of such personnel devoted to the performance of services.
The
Use Fee was determined and invoiced to OncoCyte and AgeX on a regular basis, generally monthly or quarterly. Each invoice was
payable in full within 30 days after receipt. Any invoice, or portion thereof, not paid in full when due bore interest at the
rate of 15% per annum until paid, unless the failure to make a payment was due to any inaction or delay in making a payment by
Lineage. Lineage did not charge OncoCyte or AgeX any interest.
In
addition to the Use Fee, OncoCyte and AgeX reimbursed Lineage for any out of pocket costs incurred by Lineage for the purchase
of office supplies, laboratory supplies, and other goods and materials and services for the account or use of OncoCyte or AgeX.
Lineage was not obligated to purchase or acquire any office supplies or other goods and materials or any services for OncoCyte
or AgeX, and if any such supplies, goods, materials or services were obtained, Lineage could arrange for the suppliers to invoice
OncoCyte or AgeX directly.
The
Use Fees charged to OncoCyte and AgeX were not reflected in revenues, but instead Lineage’s general and administrative expenses
and research and development expenses were shown net of those charges in the condensed consolidated statements of operations.
For
the three months ended September 30, 2019, Lineage charged Use Fees of $537,000 to OncoCyte and AgeX; $236,000 was offset against
general and administrative expenses and $301,000 was offset against research and development expenses.
For
the nine months ended September 30, 2019, Lineage charged Use Fees of $1,932,000 to OncoCyte and AgeX; $647,000 was offset against
general and administrative expenses and $1,285,000 was offset against research and development expenses.
Other
related party transactions
Lineage
currently pays $5,050 per month for the use of approximately 900 square feet of office space in New York City, which is made available
to Lineage on a month-by-month basis by one of its directors at an amount that approximates his cost (see Note 15). These payments
are expected to cease in March 2021 when the office space lease expires.
In
April 2019, Lineage issued 251,835 common shares of Lineage to Broadwood Partners, L.P., an Asterias and Lineage shareholder,
in exchange for the settlement of Asterias Warrants in connection with the Asterias Merger (see Note 3).
In
connection with the putative shareholder class action lawsuits filed in February 2019 and October 2019 challenging the Asterias
Merger (see Note 15), Lineage has agreed to pay for the legal defense of Neal Bradsher, director, and Broadwood Partners, L.P.,
a shareholder of Lineage, and Broadwood Capital, Inc., which manages Broadwood Partners, L.P., all of which were named in the
lawsuits. Through September 30, 2020, Lineage has incurred a total of $357,000 in legal expenses on behalf of the director, shareholder
and the manager of the shareholder.
As
part of financing transactions in which there were multiple other purchasers, Broadwood Partners, L.P. purchased 1,000,000 shares,
2,000,000 shares and 623,090 shares of OncoCyte common stock from Lineage in July 2019, September 2019 and January 2020, respectively.
11.
Shareholders’ Equity
Preferred
Shares
Lineage
is authorized to issue 2,000,000 preferred shares. The preferred shares may be issued in one or more series as our board of directors
may determine by resolution. Our board of directors is authorized to fix the number of shares of any series of preferred shares
and to determine or alter the rights, preferences, privileges, and restrictions granted to or imposed on the preferred shares
as a class, or upon any wholly unissued series of any preferred shares. Our board of directors may, by resolution, increase or
decrease (but not below the number of shares of such series then outstanding) the number of shares of any series of preferred
shares subsequent to the issue of shares of that series. There are no preferred shares issued and outstanding.
Common
Shares
At
September 30, 2020, Lineage was authorized to issue 250,000,000 common shares, no par value. As of September 30, 2020, and December
31, 2019, Lineage had 149,991,454 and 149,804,284 issued and outstanding common shares, respectively.
At-The-Market
Offering
On
May 1, 2020, Lineage entered into the Sales Agreement, pursuant to which Lineage may offer and sell, from time to time, through
Cantor Fitzgerald, common shares of Lineage having an aggregate offering price of up to $25,000,000. Lineage is not obligated
to sell any shares under the Sales Agreement. Subject to the terms and conditions of the Sales Agreement, Cantor Fitzgerald will
use commercially reasonable efforts, consistent with its normal trading and sales practices, applicable state and federal law,
rules and regulations, and the rules of the NYSE American, to sell the shares from time to time based upon Lineage’s instructions,
including any price, time or size limits specified by Lineage. Under the Sales Agreement, Cantor Fitzgerald may sell the shares
by any method deemed to be an “at-the-market” offering as defined in Rule 415(a)(4) under the Securities Act of 1933,
as amended, or by any other method permitted by law, including in privately negotiated transactions. Cantor Fitzgerald’s
obligations to sell the shares under the Sales Agreement are subject to satisfaction of certain conditions, including the continued
effectiveness of Lineage’s Registration Statement on Form S-3 (File No. 333-237975), which was filed with the Commission
on May 1, 2020 and was declared effective on May 8, 2020. The Sales Agreement replaced the previous sales agreement with Cantor
that had been entered into in April 2017. As of September 30, 2020, no sales had been made under the Sales Agreement.
Lineage
agreed to pay Cantor Fitzgerald a commission of 3.0% of the aggregate gross proceeds from each sale of shares, reimburse legal
fees and disbursements and provide Cantor Fitzgerald with customary indemnification and contribution rights. The Sales Agreement
may be terminated by Cantor Fitzgerald or Lineage at any time upon notice to the other party, or by Cantor Fitzgerald at any time
in certain circumstances, including the occurrence of a material and adverse change in Lineage’s business or financial condition
that makes it impractical or inadvisable to market the shares or to enforce contracts for the sale of the shares.
Reconciliation
of Changes in Shareholders’ Equity
The
following tables document the changes in shareholders’ equity for the three and nine months ended September 30, 2020 and
2019 (unaudited and in thousands):
Schedule of Shareholders' Equity
|
|
Preferred Shares
Number
|
|
|
Preferred
Shares
|
|
|
Common Shares Number
|
|
|
Common
Shares
|
|
|
Accumulated
|
|
|
Noncontrolling
Interest/
|
|
|
Accumulated Other
Comprehensive
|
|
|
Total Shareholders’
|
|
|
|
Preferred
Shares
|
|
|
Common
Shares
|
|
|
|
|
|
Noncontrolling
|
|
|
Accumulated
Other
|
|
|
Total
|
|
|
|
Number
|
|
|
|
|
|
Number
|
|
|
|
|
|
Accumulated
|
|
|
Interest/
|
|
|
Comprehensive
|
|
|
Shareholders’
|
|
|
|
of
Shares
|
|
|
Amount
|
|
|
of
Shares
|
|
|
Amount
|
|
|
Deficit
|
|
|
(Deficit)
|
|
|
Income
|
|
|
Equity
|
|
BALANCE AT DECEMBER 31, 2019
|
|
|
-
|
|
|
$
|
-
|
|
|
|
149,804
|
|
|
$
|
387,062
|
|
|
$
|
(273,422
|
)
|
|
$
|
(1,712
|
)
|
|
$
|
(681
|
)
|
|
$
|
111,247
|
|
Shares issued upon vesting of restricted stock units, net of shares
retired to pay employees’ taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
626
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
626
|
|
Foreign currency translation gain (loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,315
|
|
|
|
1,315
|
|
Financing related fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued in connection with the Asterias Merger
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued in connection with the Asterias Merge,
shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares retired in connection with the Asterias
Merger
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares retired in connection with the Asterias
Merger, shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for services, shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation for shares issued upon
vesting of Asterias restricted stock units attributable to post combination services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation for shares issued upon
vesting of Asterias restricted stock units attributable to post combination services, shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment upon adoption of leasing standard
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for settlement of Lineage Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for settlement of Lineage Warrants,
shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued through ATM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued through ATM, shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dissolution of BioTime Asia
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,399
|
)
|
|
|
(29
|
)
|
|
|
-
|
|
|
|
(8,428
|
)
|
BALANCE AT MARCH 31, 2020
|
|
|
-
|
|
|
$
|
-
|
|
|
|
149,818
|
|
|
$
|
387,686
|
|
|
$
|
(281,821
|
)
|
|
$
|
(1,741
|
)
|
|
$
|
634
|
|
|
$
|
104,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT APRIL 1, 2020
|
|
|
-
|
|
|
$
|
-
|
|
|
|
149,818
|
|
|
$
|
387,686
|
|
|
$
|
(281,821)
|
|
|
$
|
(1,741)
|
|
|
$
|
634
|
|
|
$
|
104,758
|
|
Shares issued upon vesting of restricted stock units, net of shares
retired to pay employees’ taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
13
|
|
|
|
(11
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(11
|
)
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
606
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
606
|
|
Financing related fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(10
|
)
|
Foreign currency translation gain (loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,120
|
)
|
|
|
(1,120
|
)
|
NET LOSS
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,522
|
)
|
|
|
(8
|
)
|
|
|
-
|
|
|
|
(6,530
|
)
|
BALANCE AT JUNE 30, 2020
|
|
|
-
|
|
|
$
|
-
|
|
|
|
149,831
|
|
|
$
|
388,271
|
|
|
$
|
(288,343
|
)
|
|
$
|
(1,749
|
)
|
|
$
|
(486
|
)
|
|
$
|
97,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT JULY 1, 2020
|
|
|
-
|
|
|
$
|
-
|
|
|
|
149,831
|
|
|
$
|
388,271
|
|
|
$
|
(288,343
|
)
|
|
$
|
(1,749
|
)
|
|
$
|
(486
|
)
|
|
$
|
97,693
|
|
Shares issued upon vesting of restricted stock units, net of shares
retired to pay employees’ taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
|
|
|
(6
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6
|
)
|
Shares issued for services
|
|
|
-
|
|
|
|
-
|
|
|
|
150
|
|
|
|
119
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
119
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
501
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
501
|
|
Dissolution of BioTime Asia
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(679
|
)
|
|
|
|
|
|
|
679
|
|
|
|
-
|
|
|
|
-
|
|
Financing related fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(16
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(16
|
)
|
Foreign currency translation gain (loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(335
|
)
|
|
|
(335
|
)
|
NET LOSS
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,760
|
)
|
|
|
(12
|
)
|
|
|
-
|
|
|
|
(7,772
|
)
|
BALANCE AT SEPTEMBER 30, 2020
|
|
|
-
|
|
|
$
|
-
|
|
|
|
149,991
|
|
|
$
|
388,190
|
|
|
$
|
(296,103
|
)
|
|
$
|
(1,082
|
)
|
|
$
|
(821
|
)
|
|
$
|
90,184
|
|
|
|
Preferred Shares
Number
|
|
|
Preferred
Shares
|
|
|
Common Shares Number
|
|
|
Common
Shares
|
|
|
Accumulated
|
|
|
Noncontrolling
Interest/
|
|
|
Accumulated Other
Comprehensive
|
|
|
Total Shareholders’
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Preferred
Shares
|
|
|
Common
Shares
|
|
|
|
|
|
Noncontrolling
|
|
|
Other
|
|
|
Total
|
|
|
|
Number
|
|
|
|
|
|
Number
|
|
|
|
|
|
Accumulated
|
|
|
Interest/
|
|
|
Comprehensive
|
|
|
Shareholders’
|
|
|
|
of
Shares
|
|
|
Amount
|
|
|
of
Shares
|
|
|
Amount
|
|
|
Deficit
|
|
|
(Deficit)
|
|
|
Income
|
|
|
Equity
|
|
BALANCE AT DECEMBER 31, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
127,136
|
|
|
$
|
354,270
|
|
|
$
|
(261,856
|
)
|
|
$
|
(1,594
|
)
|
|
$
|
1,426
|
|
|
$
|
92,246
|
|
Shares issued in connection with the Asterias Merger
|
|
|
-
|
|
|
|
-
|
|
|
|
24,696
|
|
|
|
32,353
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
32,353
|
|
Shares retired in connection with the Asterias Merger
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,622
|
)
|
|
|
(3,435
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,435
|
)
|
Shares issued upon vesting of restricted stock units, net of shares
retired to pay employees’ taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
118
|
|
|
|
(75
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(75
|
)
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,361
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,361
|
|
Stock-based compensation for shares issued upon vesting of Asterias
restricted stock units attributable to post combination services
|
|
|
-
|
|
|
|
-
|
|
|
|
60
|
|
|
|
79
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
79
|
|
Adjustment upon adoption of leasing standard
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
143
|
|
|
|
-
|
|
|
|
-
|
|
|
|
143
|
|
Foreign currency translation gain (loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(732
|
)
|
|
|
(732
|
)
|
Shares issued through ATM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued through ATM, shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME/(LOSS)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
39,310
|
|
|
|
(14
|
)
|
|
|
-
|
|
|
|
39,296
|
|
BALANCE AT MARCH 31, 2019
|
|
|
-
|
|
|
$
|
-
|
|
|
|
149,388
|
|
|
$
|
384,553
|
|
|
$
|
(222,403
|
)
|
|
$
|
(1,608
|
)
|
|
$
|
694
|
|
|
$
|
161,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT APRIL 1, 2019
|
|
|
-
|
|
|
$
|
-
|
|
|
|
149,388
|
|
|
$
|
384,553
|
|
|
$
|
(222,403)
|
|
|
$
|
(1,608)
|
|
|
$
|
694
|
|
|
$
|
161,236
|
|
Shares issued for settlement of Lineage Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
252
|
|
|
|
302
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
302
|
|
Shares issued upon vesting of restricted stock units, net of shares
retired to pay employees’ taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
762
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
762
|
|
Foreign currency translation gain (loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(487
|
)
|
|
|
(487
|
)
|
NET LOSS
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(30,032
|
)
|
|
|
(20
|
)
|
|
|
-
|
|
|
|
(30,052
|
)
|
BALANCE AT JUNE 30, 2019
|
|
|
-
|
|
|
$
|
-
|
|
|
|
149,643
|
|
|
$
|
385,615
|
|
|
$
|
(252,435
|
)
|
|
$
|
(1,628
|
)
|
|
$
|
207
|
|
|
$
|
131,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT JULY 1, 2019
|
|
|
-
|
|
|
$
|
-
|
|
|
|
149,643
|
|
|
$
|
385,615
|
|
|
$
|
(252,435
|
)
|
|
$
|
(1,628
|
)
|
|
$
|
207
|
|
|
$
|
131,759
|
|
Shares issued upon vesting of restricted stock units, net of shares
retired to pay employees’ taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
54
|
|
|
|
(23
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(23
|
)
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
759
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
759
|
|
Shares issued through ATM
|
|
|
-
|
|
|
|
-
|
|
|
|
93
|
|
|
|
103
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
103
|
|
Foreign currency translation gain (loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(564
|
)
|
|
|
(564
|
)
|
NET LOSS
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(16,505
|
)
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
(16,515
|
)
|
BALANCE AT SEPTEMBER 30, 2019
|
|
|
-
|
|
|
$
|
-
|
|
|
|
149,790
|
|
|
$
|
386,454
|
|
|
$
|
(268,940
|
)
|
|
$
|
(1,638
|
)
|
|
$
|
(357
|
)
|
|
$
|
115,519
|
|
Warrants
Lineage
(previously Asterias) Warrants - Liability Classified
In
March 2019, in connection with the closing of the Asterias Merger, Lineage assumed outstanding Asterias Warrants. As of September
30, 2020, the total number of common shares of Lineage subject to warrants that were assumed by Lineage in connection with the
Asterias Merger was 1,089,900, which were converted to Lineage Warrants 30 days after the closing of the Asterias Merger, with
similar terms and conditions retained under the Lineage Warrants as per the original Warrant Agreements. The Lineage Warrants
have an exercise price of $6.15 per warrant share and expire on May 13, 2021.
Cell
Cure Warrants - Liability Classified
Cell
Cure has two sets of issued warrants (the “Cell Cure Warrants”). Warrants to purchase 24,566 Cell Cure ordinary shares
at an exercise price of $40.5359 were issued to HBL in July 2017. These warrants expire in July 2022. Warrants to purchase 13,738
Cell Cure ordinary shares at exercise prices ranging from $32.02 to $40.00 per share have been issued to consultants. These warrants
expire in October 2020 and January 2024.
12.
Stock-Based Awards
Equity
Incentive Plan Awards
Effective
November 8, 2019, Lineage adopted an amendment changing the name of the BioTime, Inc. 2012 Equity Incentive Plan to the Lineage
Cell Therapeutics, Inc. 2012 Equity Incentive Plan (the “2012 Plan”). The 2012 Plan provides for the grant of stock
options, restricted stock, restricted stock units (“RSUs”) and stock appreciation rights. As of December 31, 2019,
a maximum of 24,000,000 common shares were available for grant under the 2012 Plan. Recipients of stock options are eligible to
purchase common shares at an exercise price equal to the fair market value of such shares on the date of grant. The maximum term
of options granted under the 2012 Plan is 10 years. Stock options generally vest over a four-year period based on continuous service;
however, the 2012 Plan allows for other vesting periods. Upon the expiration of the restrictions applicable to an RSU, Lineage
will either issue to the recipient, without charge, one common share per RSU or cash in an amount equal to the fair market value
of one common share. RSUs granted from the 2012 Plan reduce the shares available for grant by two shares for each RSU granted.
A
summary of Lineage’s 2012 Plan activity and other stock option awards granted outside of the 2012 Plan related information
is as follows (in thousands, except per share amounts):
Schedule of Share-based Compensation, Employee Stock Purchase Plan, Activity and Other Stock Options
|
|
Shares
Available
for Grant
|
|
|
Number
of Options
Outstanding
|
|
|
Number
of RSUs
Outstanding
|
|
|
Weighted
Average
Exercise Price
|
|
December 31, 2019
|
|
|
9,157
|
|
|
|
14,710
|
|
|
|
166
|
|
|
$
|
2.17
|
|
Restricted stock units vested
|
|
|
-
|
|
|
|
-
|
|
|
|
(58
|
)
|
|
|
-
|
|
Options granted
|
|
|
(5,256
|
)
|
|
|
5,256
|
|
|
|
-
|
|
|
|
0.71
|
|
Options exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options expired/forfeited/cancelled
|
|
|
3,756
|
|
|
|
(3,756
|
)
|
|
|
-
|
|
|
|
2.64
|
|
September 30, 2020
|
|
|
7,657
|
|
|
|
16,210
|
|
|
|
108
|
|
|
$
|
1.59
|
|
Options exercisable at September 30, 2020
|
|
|
|
|
|
|
8,352
|
|
|
|
|
|
|
$
|
2.19
|
|
At
the effective time of the Asterias Merger, Lineage assumed sponsorship of the Asterias 2013 Equity Incentive Plan (the “Asterias
Equity Plan”), with references to Asterias and Asterias common stock therein to be deemed references to Lineage and Lineage
common shares. There were 7,309,184 shares available under the Asterias Equity Plan immediately before the closing of the Asterias
Merger, which became 5,189,520 shares immediately following the Asterias Merger. The shares available under the Asterias Equity
Plan will be for awards granted to those former Asterias employees who continued as Lineage employees upon consummation of the
Asterias Merger.
A
summary of activity under the Asterias Equity Plan is as follows (in thousands, except per share amounts):
Schedule of Share-based Compensation, Employee Stock Purchase Plan, Activity
|
|
Shares
Available
for Grant
|
|
|
Number
of Options
Outstanding
|
|
|
Weighted
Average
Exercise Price
|
|
December 31, 2019
|
|
|
4,840
|
|
|
|
350
|
|
|
$
|
1.57
|
|
Options granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options forfeited
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
September 30, 2020
|
|
|
4,840
|
|
|
|
350
|
|
|
$
|
1.57
|
|
Options exercisable at September 30, 2020
|
|
|
|
|
|
|
131
|
|
|
$
|
1.57
|
|
Stock-based
compensation expense
The
fair value of each option award is estimated on the date of grant using a Black-Scholes option pricing model applying the weighted-average
assumptions noted in the following table:
Schedule of Weighted Average Assumptions to Calculate Fair Value of Stock Options
|
|
Nine Months Ended
September 30, (unaudited)
|
|
|
|
2020
|
|
|
2019
|
|
Expected life (in years)
|
|
|
6.21
|
|
|
|
6.01
|
|
Risk-free interest rates
|
|
|
0.8
|
%
|
|
|
2.2
|
%
|
Volatility
|
|
|
67.7
|
%
|
|
|
60.9
|
%
|
Dividend yield
|
|
|
-
|
%
|
|
|
-
|
%
|
Operating
expenses include stock-based compensation expense as follows (in thousands):
Schedule of Stock Based Compensation Expense
|
|
Three Months Ended
September 30, (unaudited)
|
|
|
Nine Months Ended
September 30, (unaudited)
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Research and development
|
|
$
|
126
|
|
|
$
|
135
|
|
|
$
|
343
|
|
|
$
|
418
|
|
General and administrative
|
|
|
375
|
|
|
|
624
|
|
|
|
1,390
|
|
|
|
2,543
|
|
Total stock-based compensation expense
|
|
$
|
501
|
|
|
$
|
759
|
|
|
$
|
1,733
|
|
|
$
|
2,961
|
|
The
expense related to 84,940
shares of Asterias restricted stock unit
awards that immediately vested on the closing of the Asterias Merger and converted into the right to receive common shares of
Lineage based on the Merger Exchange Ratio, resulting in 60,304
common shares of Lineage issued on March
8, 2019, was included in stock-based compensation expense for the nine months ended September 30, 2019. The expense
was not included as part of the purchase price of the Asterias Merger because these awards were principally attributable to post-combination
services.
13.
Income Taxes
The
provision for income taxes for interim periods is generally determined using an estimated annual effective tax rate as prescribed
by ASC 740-270, Income Taxes, Interim Reporting. The effective tax rate may be subject to fluctuations during the year
as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors
such as valuation allowances and changes in valuation allowances against deferred tax assets, the recognition or de-recognition
of tax benefits related to uncertain tax positions, if any, and changes in or the interpretation of tax laws in jurisdictions
where Lineage conducts business. ASC 740-270 also states that if an entity is unable to reliably estimate some or a part of its
ordinary income or loss, the income tax provision or benefit applicable to the item that cannot be estimated shall be reported
in the interim period in which the item is reported.
For
items that Lineage cannot reliably estimate on an annual basis (principally unrealized gains or losses generated by changes in
the market prices of the OncoCyte, and AgeX shares of common stock Lineage holds, and prior to March 8, 2019, Asterias shares
Lineage held), Lineage uses the actual year to date effective tax rate rather than an estimated annual effective tax rate to determine
the tax effect of each item, including the use of all available net operating losses and other credits or deferred tax assets.
The
market value of the shares of OncoCyte common stock Lineage holds creates a deferred tax liability to Lineage based on the closing
prices of the shares, less Lineage’s tax basis in the shares. The deferred tax liability generated by the OncoCyte shares
that Lineage holds as of September 30, 2020, is a source of future taxable income to Lineage, as prescribed by ASC 740-10-30-17,
that will more likely than not result in the realization of its 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, Lineage 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.
Prior
to the Asterias Merger discussed in Note 3, the Asterias shares Lineage held generated similar deferred tax liabilities to Lineage
as the OncoCyte shares discussed above. As of the Asterias Merger date and due to Asterias becoming a wholly owned subsidiary
of Lineage, the Asterias deferred tax liabilities were eliminated with a corresponding adjustment to Lineage’s valuation
allowance, resulting in no tax provision or benefit from this adjustment.
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.
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.
14.
Supplemental Cash Flow Information
Supplemental
disclosure of cash flow information for the nine months ended September 30, 2020 and 2019 is as follows (in thousands):
Schedule of Supplemental Cash Flow Information
|
|
Nine Months Ended
September 30, (unaudited)
|
|
|
|
2020
|
|
|
2019
|
|
Cash paid during period for interest
|
|
$
|
19
|
|
|
$
|
24
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Issuance of common shares for the Asterias Merger (Note 3)
|
|
$
|
-
|
|
|
$
|
32,353
|
|
Assumption of liabilities in the Asterias Merger (Note 3)
|
|
|
-
|
|
|
|
1,136
|
|
Assumptions of warrants in the Asterias Merger (Note 3)
|
|
|
-
|
|
|
|
867
|
|
Issuance of common shares for settlement of Lineage Warrants
|
|
|
-
|
|
|
|
332
|
|
15.
Commitments and Contingencies
Carlsbad
Lease
In
May 2019, Lineage entered into a lease for approximately 8,841 square feet of rentable space in an office park in Carlsbad, California
(the “Carlsbad Lease”). The term of the Carlsbad Lease commenced on August 1, 2019 and expires on October 31, 2022.
Base
rent under the Carlsbad Lease beginning on August 1, 2019 is $17,850 per month and will increase by 3% annually on every August
1 thereafter during the lease term. Base rent for the first twenty-four months of the lease is based upon a deemed rentable area
of 7,000 square feet. Base rent was abated for months two through five of the lease.
In
addition to base rent, Lineage will pay a pro rata portion of increases in certain expenses, including real property taxes, utilities
(to the extent not separately metered to the leased space) and the landlord’s operating expenses, over the amounts of those
expenses incurred by the landlord. As security for the performance of its obligations under the Carlsbad Lease, Lineage provided
the landlord with a security deposit of $17,850.
Alameda
Leases and Alameda Sublease
In
December 2015, Lineage entered into leases of office and laboratory space located in two
buildings in Alameda, California (the “Alameda Leases”) comprised of 22,303
square feet (the “1010 Atlantic Premises”) and 8,492
square feet (the “1020 Atlantic Premises”). Base rent under the Alameda Leases beginning on February 1, 2020 was
$72,676
per month with annual increases of approximately 3%. In
addition to base rent, Lineage paid a pro rata portion of increases in certain expenses, including real property taxes,
utilities (to the extent not separately metered to the leased space) and the landlord’s operating expenses, over the
amounts of those expenses incurred by the landlord. As security for its obligations, Lineage provided the landlord
with a security deposit of approximately $424,000,
which was reduced to $78,000
on January 24, 2019 in accordance with the terms of the lease. The security deposit amount is considered
restricted cash and is included in deposits and other long-term assets as of September 30, 2020 (See Note 2).
In
April 2020, Lineage entered into a sublease with Industrial Microbes, Inc. (“Industrial Microbes”) for the use of
10,000 square feet in the 1010 Atlantic Premises (the “Industrial Microbes Sublease”). Base rent under the Industrial
Microbes Sublease was $28,000 per month with annual increases of approximately 3%. Base
rent for the first month was abated. In addition to base rent and utilities, Industrial Microbes paid a pro-rata portion of increases
in operating expenses, after an abatement period of one year.
On
September 11, 2020, Lineage entered into a Lease Termination Agreement with the landlord terminating the Alameda Leases effective
as of August 31, 2020 for the 1020 Atlantic Premises and September 30, 2020 for the 1010 Atlantic Premises. In
consideration for the termination of the leases, Lineage paid a termination fee of $130,000
and other
amounts due under the terms of the Alameda Leases through the applicable effective termination dates, except that no rent was
due with respect to the 1020 Atlantic Premises after July 31, 2020. Lineage’s
security deposit is expected to be returned to Lineage by January 2021. Lineage paid a separate
termination fee of $30,000
to Industrial
Microbes in connection with the termination of the Industrial Microbes Sublease and returned the
$56,000
security deposit paid by Industrial Microbes.
For the period of sublease from mid-April 2020 through September 2020, Lineage received $119,000 in rental income from Industrial
Microbes.
Lineage
will continue to occupy approximately 2,432
square feet of
the 1010 Atlantic Premises under a new sublease agreement (the “Alameda Sublease”). The
term of the Alameda Sublease is from October
1, 2020 through January
31, 2023. Base rent under the Alameda
Sublease is $14,592
per month with annual increases of 3%
each October 1 thereafter during the lease term. Base rent for the first month was abated. Lineage paid a security deposit of
$16,000
under the Alameda Sublease; this amount
is considered restricted cash and is included in deposits and other long-term assets as of September 30, 2020 (see Note
2).
Based
on the smaller footprint, and after taking into consideration the fees disclosed above, Lineage has reduced its contractual obligations
by approximately $780,000 over the remaining life of the original leases through January 31, 2023.
New
York Leased Office Space
Lineage
currently pays $5,050 per month for the use of approximately 900 square feet of office space in New York City, which is made available
to Lineage for use in conducting meetings and other business affairs, on a month-by-month basis, by one of its directors at an
amount that approximates his cost. This lease is not in the scope of ASC 842 because it is a month to month lease (see Note 2).
Cell
Cure Leases
Cell
Cure leases 728.5
square meters (approximately 7,842
square feet) of office and laboratory
space in Jerusalem, Israel under a lease that expires December
31, 2020, with two options to extend the
lease for five years each (the “Original Cell Cure Lease”). Negotiations are currently ongoing for a lease extension. Base monthly rent is NIS 37,882
(approximately US $11,000
per month using the December 31, 2018
exchange rate). In addition to base rent, Cell Cure pays a pro-rata share of real property taxes and certain costs related to
the operation and maintenance of the building in which the leased premises are located.
On
January 28, 2018, Cell Cure entered into another lease agreement for an additional 934 square meters (approximately 10,054 square
feet) of office space in the same facility in Jerusalem, Israel under a lease that expires on December 31, 2025, with two options
to extend the lease for five years each (the “January 2018 Lease”). The January 2018 Lease commenced on April 1, 2018
and included a leasehold improvement construction allowance of up to NIS 4,000,000 (approximately up to US $1.1 million using
the December 31, 2018 exchange rate) from the landlord. The leasehold improvements were completed in December 2018 and the entire
allowance was used. Beginning on January 1, 2019, combined base rent and construction allowance payments for the January 2018
Lease are NIS 93,827 per month (approximately $26,000 per month).
In
December 2018, Cell Cure made a $388,000 deposit required under the January 2018 Lease, which amount is included in deposits and
other long-term assets on the consolidated balance sheet as of December 31, 2018, to be held as restricted cash during the term
of the January 2018 Lease.
The
below table provides supplemental cash flow information related to leases as follows (in thousands):
Schedule of Supplemental Cash Flow Information Related to Leases
|
|
Nine Months Ended
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
1,157
|
|
|
$
|
1,026
|
|
Operating cash flows from financing leases
|
|
|
19
|
|
|
|
24
|
|
Financing cash flows from financing leases
|
|
|
24
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
29
|
|
|
|
89
|
|
Financing leases
|
|
|
-
|
|
|
|
-
|
|
Supplemental
balance sheet information related to leases is as follows (in thousands, except lease term and discount rate):
Schedule of Supplemental Balance Sheet Information Related to Leases
|
|
September
30, 2020
|
|
|
December 31, 2019
|
|
Operating leases
|
|
|
|
|
|
|
|
|
Right-of-use assets, net
|
|
$
|
1,982
|
|
|
$
|
4,666
|
|
|
|
|
|
|
|
|
|
|
Right-of-use lease liabilities, current
|
|
|
473
|
|
|
|
1,190
|
|
Right-of-use lease liabilities, noncurrent
|
|
|
1,800
|
|
|
|
3,868
|
|
Total operating lease liabilities
|
|
$
|
2,273
|
|
|
$
|
5,058
|
|
|
|
|
|
|
|
|
|
|
Financing leases
|
|
|
|
|
|
|
|
|
Property and equipment, gross
|
|
$
|
80
|
|
|
$
|
96
|
|
Accumulated depreciation
|
|
|
(62
|
)
|
|
|
(48
|
)
|
Property and equipment, net
|
|
$
|
18
|
|
|
$
|
48
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
15
|
|
|
$
|
33
|
|
Long-term liabilities
|
|
|
29
|
|
|
|
77
|
|
Total finance lease liabilities
|
|
$
|
44
|
|
|
$
|
110
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
4.4 years
|
|
|
|
4.1 years
|
|
Finance leases
|
|
|
2.7 years
|
|
|
|
3.4 years
|
|
Weighted average discount rate
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
9.1
|
%
|
|
|
9.1
|
%
|
Finance leases
|
|
|
10.0
|
%
|
|
|
10.0
|
%
|
Future
minimum lease commitments are as follows as of September 30, 2020 (in thousands):
Schedule of Future Minimum Lease Commitments
|
|
Operating Leases
|
|
|
Finance Leases
|
|
Year Ending December 31,
|
|
|
|
|
|
|
|
|
2020
|
|
$
|
181
|
|
|
$
|
5
|
|
2021
|
|
|
635
|
|
|
|
19
|
|
2022
|
|
|
585
|
|
|
|
19
|
|
2023
|
|
|
319
|
|
|
|
8
|
|
2024
|
|
|
308
|
|
|
|
-
|
|
Thereafter
|
|
|
796
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total lease payments
|
|
$
|
2,824
|
|
|
$
|
51
|
|
Less imputed interest
|
|
|
(551
|
)
|
|
|
(7
|
)
|
Total
|
|
$
|
2,273
|
|
|
$
|
44
|
|
The
Alameda Sublease is not included in the table above as it does not commence until October 1, 2020. Future minimum payments under
the Alameda Sublease are as follows: $29,000, $176,000, $182,000 and $16,000 for the years ended December 31, 2020, 2021, 2022
and 2023, respectively.
Research
and Option Agreement
On
January 5, 2019, Lineage and Orbit Biomedical Limited (“Orbit”) entered into a Research and Option Agreement, which
was assigned by Orbit to Gyroscope Therapeutics, Limited (“Gyroscope”) and amended on May 7, 2019, January 30, 2020,
May 1, 2020 and September 4, 2020 (the “Gyroscope Agreement”). As amended, the Gyroscope Agreement provides Lineage
access to Gyroscope’s vitrectomy-free subretinal injection device (the “Orbit Device”) as a means of delivering
OpRegen in Lineage’s ongoing Phase 1/2a clinical trial through the earlier of: (i) December 1, 2020; or (ii) or treatment
of three additional patients with the Orbit Device between September 4, 2020 and December 1, 2020 (the “Access Period”).
Pursuant to the terms of the Gyroscope Agreement, Lineage paid access fees totaling $2.5
million: (i) $1.25
million in January 2019 upon execution
of the Gyroscope Agreement; and (ii) $1.25
million in August 2019 upon completion
of certain collaborative research activities using the Gyroscope technology for the OpRegen Phase 1/2a clinical trial. These access
fees of $2.5 million
were amortized on a straight-line basis throughout 2019 and included in research and development expenses. Lineage also agreed
to reimburse Gyroscope for costs of consumables, training services, travel costs and other out of pocket expenses incurred by
Gyroscope for performing services under the Gyroscope Agreement. In January 2020, Lineage agreed to pay an additional $0.5
million to extend the Access Period to
July 5, 2020, $0.2
million of which was paid on January 30,
2020 and $0.3
million of which will be paid in November
2020. The Access Period was subsequently extended at no cost as described above.
Lineage
has exclusive rights to the Gyroscope technology and its injection device for the delivery of retinal pigment epithelium cells
for the treatment of dry AMD during the term of the Gyroscope Agreement.
Litigation
Lineage
is subject to various claims and contingencies in the ordinary course of its business, including those related to litigation,
business transactions, employee-related matters, and others. When Lineage is aware of a claim or potential claim, it assesses
the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably
estimated, Lineage will record a liability for the loss. If the loss is not probable or the amount of the loss cannot be reasonably
estimated, Lineage will disclose the claim if the likelihood of a potential loss is reasonably possible and the amount involved
could be material. Lineage is not aware of any claims likely to have a material adverse effect on its financial condition or results
of operations.
On
February 19, 2019, a putative shareholder class action lawsuit was filed (captioned Lampe v. Asterias Biotherapeutics, Inc.
et al., Case No. RG19007391) in the Superior Court of the State of California, County of Alameda challenging the Asterias
Merger. On March 1, 2019, Asterias made certain amendments and supplements to its public disclosures regarding the Asterias Merger
(the “Supplemental Disclosures”). On May 3, 2019, an amended class action complaint (the “Amended Complaint”)
was filed. The Amended Complaint named Lineage, Patrick Merger Sub, Inc., the Asterias board of directors, one member of Lineage’s
board of directors, and certain stockholders of both Lineage and Asterias. The action was brought by two purported stockholders
of Asterias, on behalf of a putative class of Asterias stockholders, and asserted breach of fiduciary duty and aiding and abetting
claims under Delaware law. The Amended Complaint alleged, among other things, that the process leading up to the Asterias Merger
was conflicted and inadequate, and that the proxy statement filed by Asterias with the Commission omitted certain material information,
which allegedly rendered the information disclosed materially misleading. The Amended Complaint sought, among other things, that
a class be certified, the recovery of monetary damages, and attorneys’ fees and costs.
On
June 3, 2019, defendants filed demurrers to the Amended Complaint. On August 13, 2019, the parties submitted a stipulation to
the court seeking dismissal of the action with prejudice as to the named Plaintiffs and without prejudice as to the unnamed putative
class members, and disclosing to the court the parties’ agreement to resolve, for $200,000, Plaintiffs’ claim for
an award of attorneys’ fees and expenses in connection with the purported benefit conferred on Asterias stockholders by
the Supplemental Disclosures. The court granted the stipulation and dismissed the action August 14, 2019. Lineage continues to
believe that the claims and allegations in the action lack merit, but believed that it was in Lineage’s shareholders’
best interest for the action to be dismissed and to resolve the fee claim in a timely manner without additional costly litigation
expenses.
On
October 15, 2019, another putative class action lawsuit was filed challenging the Asterias Merger. This action (captioned
Ross v. Lineage Cell Therapeutics, Inc., et al., C.A. No. 2019-0822) was filed in Delaware Chancery Court and names Lineage,
the Asterias board of directors, one member of Lineage’s board of directors, and certain stockholders of both Lineage and
Asterias as defendants. The action was brought by a purported stockholder of Asterias, on behalf of a putative class of Asterias
stockholders, and asserts breach of fiduciary duty and aiding and abetting claims under Delaware law. The complaint alleges, among
other things, that the process leading up to the Asterias Merger was conflicted, that the Asterias Merger consideration was inadequate,
and that the proxy statement filed by Asterias with the Commission omitted certain material information, which allegedly rendered
the information disclosed materially misleading. The complaint seeks, among other things, that a class be certified, the recovery
of monetary damages, and attorneys’ fees and costs. On December 20, 2019, the defendants moved to dismiss the complaint.
On February 10, 2020, the plaintiff filed an opposition. Defendants filed their replies on March 13, 2020. On June 23, 2020, a
hearing on the motions to dismiss occurred. On September 21, 2020, the Chancery Court denied the motion to dismiss as to Lineage
and certain members of the Asterias board of directors, and it granted the motion to dismiss as to all other defendants. On October
30, 2020, the remaining defendants filed an answer to the complaint.
Lineage
believes the allegations in the action lack merit and intends to vigorously defend the claims asserted. It is impossible at this
time to assess whether the outcome of this proceeding will have a material adverse effect on Lineage’s consolidated results
of operations, cash flows or financial position. Therefore, in accordance with ASC 450, Contingencies, Lineage has not
recorded any accrual for a contingent liability associated with this legal proceeding based on its belief that a liability, while
possible, is not probable nor estimable, and any range of potential contingent liability amounts cannot be reasonably estimated
at this time. Lineage records legal expenses as incurred.
Employment
contracts
Lineage
has entered into employment agreements with certain executive officers. Under the provisions of the agreements, Lineage may be
required to incur severance obligations for matters relating to changes in control, as defined in the agreements, and involuntary
terminations.
Indemnification
In
the normal course of business, Lineage may provide indemnifications of varying scope under Lineage’s agreements with other
companies or consultants, typically Lineage’s clinical research organizations, investigators, clinical sites, suppliers
and others. Pursuant to these agreements, Lineage will generally agree to indemnify, hold harmless, and reimburse the indemnified
parties for losses and expenses suffered or incurred by the indemnified parties arising from claims of third parties in connection
with the use or testing of Lineage’s products and services. Indemnification provisions could also cover third party infringement
claims with respect to patent rights, copyrights, or other intellectual property pertaining to Lineage products and services.
The term of these indemnification agreements will generally continue in effect after the termination or expiration of the particular
research, development, services, or license agreement to which they relate. The potential future payments Lineage could be required
to make under these indemnification agreements will generally not be subject to any specified maximum amount. Historically, Lineage
has not been subject to any claims or demands for indemnification. Lineage also maintains various liability insurance policies
that provide Lineage with insurance against claims or demands for indemnification in specified circumstances. As a result, Lineage
believes the fair value of these indemnification agreements is minimal. Accordingly, Lineage has not recorded any liabilities
for these agreements as September 30, 2020 and December 31, 2019.
Second
Amendment to Clinical Trial and Option Agreement and License Agreement with Cancer Research UK
On
May 6, 2020, Lineage and its wholly owned subsidiary Asterias entered into a Second Amendment to Clinical Trial and Option Agreement
(the “CTOA Amendment”) with Cancer Research UK (“CRUK”) and Cancer Research Technology Limited (“CRT”),
which amends the Clinical Trial and Option Agreement entered into between Asterias, CRUK and CRT dated September 8, 2014, as amended
September 8, 2014. Pursuant to the CTOA Amendment, Lineage assumed all obligations of Asterias and exercised early its option
to acquire data generated in the Phase 1 clinical trial of VAC2 in non-small cell lung cancer being conducted by CRUK. CRUK will
continue conducting the VAC2 study.
Lineage
and CRT effectuated the option by simultaneously entering into a license agreement (the “License Agreement”) pursuant
to which Lineage agreed to pay the previously agreed signature fee of £1,250,000 (approximately $1.6 million). In consideration
of Lineage’s agreement to exercise the option prior to completion of the study, the parties agreed to defer the signature
fee as follows: £500,000 in September 2020, £500,000 in January 2021 and £250,000 in April 2021. For the primary
licensed product for the first indication, the License Agreement provides for milestone fees of up to £8,000,000 based upon
initiation of a Phase 3 clinical trial and the filing for regulatory approval and up to £22,500,000 in sales-based milestones
payments. Additional milestone fees and sales-based milestone payments would be payable for other products or indications, and
mid-single-digit royalty payments are payable on sales of commercial products.
Either
party may terminate the License Agreement for the uncured material breach of the other party. CRT may terminate the License Agreement
in the case of Lineage’s insolvency or if Lineage ceases all development and commercialization of all products under the
License Agreement.
Second
Amended and Restated License Agreement
On
June 15, 2017, Cell Cure entered into a Second Amended and Restated License Agreement (the “License Agreement”) with
Hadasit Medical Research Services and Development Ltd. (“Hadasit”), the commercial arm and a wholly owned subsidiary
of Hadassah Medical Organization. Pursuant to the License Agreement, Hadasit granted Cell Cure an exclusive, worldwide, royalty
bearing license (with the right to grant sublicenses) in its intellectual property portfolio of materials and technology related
to human stem cell derived photoreceptor cells and retinal pigment epithelial cells (the “Licensed IP”), to use, commercialize
and exploit any part thereof, in any manner whatsoever in the fields of the development and exploitation of: (i) human stem cell
derived photoreceptor cells, solely for use in cell therapy for the diagnosis, amelioration, prevention and treatment of eye disorders;
and (ii) human stem cell derived retinal pigment epithelial cells, solely for use in cell therapy for the diagnosis, amelioration,
prevention and treatment of eye disorders.
As
consideration for the Licensed IP, Cell Cure will pay a small one-time lump sum payment, a royalty in the mid-single digits of
net sales from sales of Licensed IP by any invoicing entity, and a royalty of 21.5% of sublicensing receipts. In addition, Cell
Cure will pay Hadasit an annual minimal non-refundable royalty, which will become due and payable the first January 1 following
the completion of services to Cell Cure by a research laboratory.
Cell
Cure will pay Hadasit non-refundable milestone payments upon the recruitment of the first patient for the first Phase 2b clinical
trial, upon the enrollment of the first patient in the first Phase 3 clinical trials, upon delivery of the report for the first
Phase 3 clinical trials, upon the receipt of an NDA or marketing approval in the European Union, whichever is the first to occur,
and upon the first commercial sale in the United States or European Union, whichever is the first to occur. Such milestones, in
the aggregate, may be up to $3.5 million. As of September 30, 2020, Cell Cure had not accrued any milestone payments under the
License Agreement.
The
License Agreement terminates upon the expiration of Cell Cure’s obligation to pay royalties for all licensed products, unless
earlier terminated. In addition to customary termination rights of both parties, Hadasit may terminate the License Agreement if
Cell Cure fails to continue the clinical development of the Licensed IP or fails to take actions to commercialize or sell the
Licensed IP over any consecutive 12 month period. The License Agreement also contains mutual confidentiality obligations of Cell
Cure and Hadasit, and indemnification obligations of Cell Cure.
Royalty
obligations and license fees
Lineage
and its subsidiaries or affiliates are parties to certain licensing agreements with research institutions, universities and other
parties for the rights to use those licenses and other intellectual property in conducting research and development activities.
These licensing agreements provide for the payment of royalties by Lineage or the applicable party to the agreement on future
product sales, if any. In addition, in order to maintain these licenses and other rights during the product development, Lineage
or the applicable party to the contract must comply with various conditions including the payment of patent related costs and
annual minimum maintenance fees. Annual minimum maintenance fees are expected to be approximately $30,000 to $60,000 per year.
Grants
Under
the terms of the grant agreement between Cell Cure and Israel Innovation Authority (“IIA”) (formerly the Office of
the Chief Scientist of Israel) of the Ministry of Economy and Industry, for the development of OpRegen, Cell Cure will be required
to pay royalties on future product sales, if any, up to the amounts received from the IIA, plus interest indexed to LIBOR. Cell
Cure’s research and product development activities under the grant are subject to substantial risks and uncertainties and
performed on a best efforts basis. As a result, Cell Cure is not required to make any payments under the grant agreement unless
it successfully commercializes OpRegen. Accordingly, pursuant to ASC 730-20, the grant is considered a contract to perform research
and development services for others and grant revenue is recognized as the related research and development expenses are incurred
(see Note 2).
Israeli
law pertaining to such government grants contain various conditions, including substantial penalties and restrictions on the transfer
of intellectual property, or the manufacture, or both, of products developed under the grant outside of Israel, as defined by
the IIA.
16.
Subsequent Events
Sales
of Hadasit Marketable Equity Securities
In
October 2020, Lineage sold 315,000 shares of its Hadasit common stock for gross proceeds of approximately $831,000.