Item
1A. Risk Factors
An
investment in our common shares involves a high degree of risk. You should carefully consider the following risk factors, as well as
the other information in this Report, before deciding whether to purchase, hold or sell our common shares. The occurrence of any of the
following risks could harm our business, financial condition, results of operations and/or growth prospects or cause our actual results
to differ materially from those contained in forward-looking statements we have made in this Report and those we may make from time to
time. You should consider all of the risk factors described when evaluating our business. We have marked with an asterisk (*) those risk
factors that reflect changes from the similarly titled risk factors included in Item 1A of our Annual Report on Form 10-K for the fiscal
year ended December 31, 2020, as filed with the Commission on March 11, 2021.
Risks
Related to Our Business Operations and Capital Requirements
We
have incurred operating losses since inception, and we do not know if or when we will attain profitability.*
Our
total operating losses for the fiscal year ended December 31, 2020 were $26.4 million and our total operating losses for the six months
ended June 30, 2021 were $14.1 million, and we had an accumulated deficit of $300.3 million as of June 30, 2021. Since inception, we
have incurred significant operating losses and have funded our operations primarily through sales of our equity securities and the equity
securities of former subsidiaries, receipt of research grants, royalties on product sales, license revenues, sales of research products,
and revenues from subscription fees and advertising revenue from database products of a former subsidiary. Substantially all of our losses
have resulted from expenses incurred in connection with our research and development programs and from general and administrative costs
associated with our operations. All of our product candidates will require substantial additional development time and resources before
we would be able to apply for or receive regulatory approvals. We expect to continue to incur losses for the foreseeable future, and
we anticipate these losses will increase substantially as we continue our development of, seek regulatory approval for and potentially
commercialize any of our product candidates and seek to identify, assess, acquire, in-license or develop additional product candidates.
To
become and remain profitable, we must succeed in developing and eventually commercializing products that generate significant revenue.
This will require us to be successful in a range of challenging activities, including completing clinical trials and preclinical trials
of our product candidates, obtaining regulatory approval for these product candidates and manufacturing, marketing and selling any products
for which we may obtain regulatory approval. In addition, we are attempting to develop new medical products and technology. We may never
succeed in these activities and, even if we do, may never generate revenues that are significant enough to achieve profitability.
We
will continue to spend a substantial amount of our capital on research and development, but we might not succeed in developing products
and technologies that are useful in medicine.*
We
are attempting to develop new medical products and technology. These new products and technologies might not prove to be safe and efficacious
in the human medical applications for which they are being developed. Our research and development activities are costly, time consuming,
and their results are uncertain. We incurred research and development expenses amounting to approximately $6.3 million during the six
months ended June 30, 2021, and $12.3 million during the fiscal year ended December 31, 2020. If we successfully develop a new technology
or product, refinement of the new technology or product and definition of the practical applications and limitations of the technology
or product may take years and require large sums of money. Clinical trials of new therapeutic products, particularly those products that
are regulated as biologics, drugs, or devices, are very expensive and take years to complete. We may not have the financial resources
to fund clinical trials on our own and we may have to enter into licensing or collaborative arrangements with others. Any such arrangements
may be dilutive to our ownership or economic interest in the products we develop, and we might have to accept royalty payments on product
sales rather than receiving the gross revenues from product sales. In addition, we may discontinue one or more of the research or product
development programs. Our product and technology development programs may be delayed or discontinued should adequate funding on acceptable
terms not be available.
The
amount and pace of research and development work that we can do or sponsor, and our ability to commence and complete clinical trials
required to obtain regulatory approval to market our therapeutic and medical device products, depends upon the amount of funds we have.*
At
June 30, 2021, we had $68.7 million of cash, cash equivalents and marketable equity securities. There can be no assurance that we will
be able to raise additional funds on favorable terms or at all, or that any funds raised will be sufficient to permit us to develop and
market our products and technology, if and when approved. Our ability to raise additional funds may be adversely impacted by deteriorating
global economic conditions and the disruptions to and volatility in the credit and financial markets in the United States and worldwide
resulting from the ongoing COVID-19 pandemic. Unless we are able to generate sufficient revenue or raise additional funds when needed,
it is likely that we will be unable to continue our planned activities, even if we make progress in our research and development projects.
We may have to postpone or limit the pace of our research and development work and planned clinical trials of our product candidates
unless our cash resources increase through a growth in revenues, royalties, license fees, equity financings or borrowings.
We
will need to issue additional equity or debt securities in order to raise additional capital needed to pay our operating expenses.
We
expect to continue to incur substantial research and product development expenses and will need to raise additional capital to pay operating
expenses until we are able to generate sufficient revenues from product sales, royalties and license fees. Our ability to raise additional
equity or debt capital will depend, not only on progress made in developing new products and technologies, but also on access to capital
and conditions in the capital markets. We believe that our cash, cash equivalents and marketable securities as of June 30, 2021 will
be sufficient to fund our planned operations for at least the next 12 months. We have based these estimates on assumptions that may prove
to be wrong, and we may use our capital resources sooner than we currently expect. Our operating plans and other demands on our cash
resources may change as a result of many factors currently unknown to us, and we may need to seek additional funds sooner than planned.
Any equity capital raise could result in the dilution of the interests of shareholders or may otherwise limit our ability to finance
further in the future, which may negatively impact our business and operations. Any debt capital financing may involve covenants that
restrict our operations, including limitations on additional borrowing and on the use of our assets. If we raise capital through licensing
arrangements, it may be necessary to grant licenses on terms that are not favorable to us. There can be no assurance that we will be
able to raise capital on favorable terms, or at all, or at times and in amounts needed to successfully finance product development, clinical
trials, and general operations.
Lawsuits
have been filed and other lawsuits may be filed against our company and certain members of our company’s and Asterias Biotherapeutics,
Inc.’s (“Asterias”) boards of directors relating to our acquisition of Asterias (the “Asterias Merger”).
An adverse ruling in any such lawsuit may result in additional payments and costs.
A
putative class action lawsuit alleging breach of fiduciary duties in connection with the Asterias Merger is pending in the Delaware Chancery
Court. The defendants are certain former members of Asterias’ board of directors and our company’s board of directors. The
complaint alleges that the merger process was conflicted, that the consideration was inadequate, and that the proxy statement filed by
Asterias was misleading. The complaint seeks, among other things, certification of a class, rescission of the merger or monetary damages,
and attorneys’ fees and costs.
The
defendants specifically deny all allegations in the litigation and intend to defend it vigorously. However, any adverse ruling in this
case could result in additional payments. Additional lawsuits arising out of or relating to the merger agreement and/or the merger may
be filed in the future.
Changes
in tax laws or regulations that are applied adversely to us or our customers may have a material adverse effect on our business, cash
flow, financial condition or results of operations.*
New
income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time, which could adversely
affect our business operations and financial performance. Further, existing tax laws, statutes, rules, regulations or ordinances could
be interpreted, changed, modified or applied adversely to us. For example, the legislation enacted in 2017, informally titled the Tax
Cuts and Jobs Act (the “2017 Tax Act”), enacted many significant changes to the U.S. tax laws. Future guidance from the Internal
Revenue Service and other tax authorities with respect to the 2017 Tax Act may affect us, and certain aspects of the 2017 Tax Act could
be repealed or modified in future legislation. For example, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES
Act”) modified certain provisions of the 2017 Tax Act. In addition, it is uncertain if and to what extent various states will conform
to the 2017 Tax Act, the CARES Act, or any newly enacted federal tax legislation. Changes in corporate tax rates, the realization of
net deferred tax assets relating to our operations, the taxation of foreign earnings, and the deductibility of expenses under the 2017
Tax Act or future reform legislation could have a material impact on the value of our deferred tax assets, could result in significant
one-time charges, and could increase our future U.S. tax expense.
Our
ability to use net operating losses and other tax attributes to offset future taxable income or taxes may be subject to limitations.
As
of December 31, 2020, we had net operating loss (“NOL”) carryforwards for U.S. federal and state tax purposes of approximately
$169.9 million and $118.6 million, respectively. Included in these amounts are NOLs acquired through the merger with Asterias (see below).
A portion of the federal and state NOL carryforwards will begin to expire, if not utilized, in varying amounts between 2027 and 2037.
NOLs that expire unused will be unavailable to offset future income tax liabilities. Under federal income tax law, federal NOLs incurred
in tax years beginning after December 31, 2017, may be carried forward indefinitely, but the deductibility of such NOLs in tax years
beginning after December 31, 2020, is limited to 80% of taxable income. It is uncertain if and to what extent various states that we
may operate in will conform to the federal tax law. In addition, under Sections 382 and 383 of the Internal Revenue Code of 1986, as
amended (the “IRC”), and corresponding provisions of state law, if a corporation undergoes an “ownership change,”
which is generally defined as a greater than 50% change, by value, in its equity ownership over a three-year period, the corporation’s
ability to use its pre-change NOL carryforwards and other pre-change tax attributes to offset its post-change income or taxes may be
limited. We may experience ownership changes in the future as a result of subsequent shifts in our stock ownership, some of which may
be outside of our control. If an ownership change occurs and our ability to use our NOL carryforwards is materially limited, it would
harm our future operating results by effectively increasing our future tax obligations. In addition, at the state level, there may be
periods during which the use of net operating loss carryforwards is suspended or otherwise limited, which could accelerate or permanently
increase state taxes owed. For example, in 2020 California enacted A.B. 85 which imposed limits on the usability of California state
net operating losses and certain tax credits in tax years beginning after 2019 and before 2023.
As
part of the merger with Asterias, we acquired various tax attribute carryforwards including federal and California NOLs of $52.8 million
and $41.9 million, respectively, as well as California research and development credits of $2.4 million. As a result of the merger, Asterias
incurred an ownership change under Section 382 of the IRC, which places annual limits on the amount of these NOLs that are available
to offset income. Because of the annual limitation, the total amount of these NOLs is not immediately available to offset future income.
The California research and development credit of $2.4 million has no expiration date.
Taxing
authorities could reallocate our taxable income among our subsidiaries, which could increase our overall tax liability.
We
are organized in the United States, and currently have subsidiaries in Israel and Singapore. If we succeed in growing our business, we
expect to conduct increased operations through subsidiaries in various tax jurisdictions pursuant to transfer pricing arrangements between
us and our subsidiaries. If two or more affiliated companies are located in different countries, the tax laws or regulations of each
country generally will require that such arrangements be priced the same as those between unrelated companies dealing at arm’s
length and that appropriate documentation is maintained to support the value of such arrangements. Our transfer pricing policies were
formulated with the assistance of third-party experts. We are in the process of obtaining a formal transfer pricing report. However,
after we receive such report, we do not intend to amend our returns for prior years. Whether we obtain a formal transfer pricing study
with outside experts or not, our transfer pricing procedures will not be binding on applicable tax authorities.
If
tax authorities in any of these countries were to successfully challenge our transfer prices as not reflecting arm’s length transactions,
they could require us to adjust our transfer prices and thereby reallocate our income to reflect these revised transfer prices, which
could result in a higher tax liability to us. In addition, if the country from which the income is reallocated does not agree with the
reallocation, both countries could tax the same income, resulting in double taxation. If tax authorities were to allocate income to a
higher tax jurisdiction, subject our income to double taxation or assess interest and penalties, it would increase our tax liability,
which could adversely affect our financial condition, results of operations and cash flows.
Our
business and operations could suffer in the event of system failures.
Despite
the implementation of security measures, our internal computer systems and those of our contractors and consultants are vulnerable to
damage from computer viruses, unauthorized access, natural disasters including earthquakes and tsunamis, terrorism, war, and telecommunication
and electrical failures. Such events could cause significant interruption of our operations and development programs. For example, the
loss of data for our product candidates could result in delays in our regulatory filings and development efforts and significantly increase
our costs. To the extent that any disruption or security breach was to result in a loss of or damage to our data, or inappropriate disclosure
of confidential or proprietary information, we could incur liability and the development of our product candidates could be delayed.
In
addition, our product candidates are manufactured by starting with cells that are stored in a cryopreserved master cell bank. While we
believe we have adequate backup should any cell bank be lost in a catastrophic event, we or our third-party suppliers and manufacturers
could lose multiple cell banks, which would severely affect our manufacturing activities. We cannot assure you that any stability or
other issues relating to the manufacture of any of our product candidates or products will not occur in the future. Any delay or interruption
in the supply of clinical trial supplies could delay the completion of planned clinical trials, increase the costs associated with maintaining
clinical trial programs and, depending upon the period of delay, require us to commence new clinical trials at additional expense or
terminate clinical trials completely. Any adverse developments affecting clinical or commercial manufacturing of our product candidates
or products may result in shipment delays, inventory shortages, lot failures, product withdrawals or recalls or other interruptions in
the supply of our product candidates or products. Accordingly, failures or difficulties faced at any level of our supply chain could
adversely affect our business and delay or impede the development and commercialization of any of our product candidates or products
and could have an adverse effect on our business, prospects, financial condition and results of operations.
Our
business could be adversely affected if we lose the services of the key personnel upon whom we depend or if we fail to attract senior
management and key scientific personnel.
We
believe that our continued success depends to a significant extent upon our efforts and ability to retain highly qualified personnel,
including our Chief Executive Officer, Brian Culley. All of our officers and other employees are at-will employees and may terminate
their employment with us at any time with no advance notice. The loss of the services of Mr. Culley or other members of our senior management
could have a material adverse effect on us. Further, the replacement of any of such individuals likely would involve significant time
and costs and may significantly delay or prevent the achievement of our business and clinical objectives and would harm our business.
In
addition, we could experience difficulties attracting qualified employees in the future. For example, competition for qualified personnel
in the biotechnology and medical device field is intense due to the limited number of individuals who possess the skills and experience
required by our industry. We will need to hire additional personnel, including experienced sales representatives, as we expand our clinical
development and commercial activities. We may not be able to attract quality personnel on acceptable terms, or at all. In addition, to
the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited or that they
have divulged proprietary or other confidential information or that their former employers own their research output.
The
value of our investments in public companies fluctuates based on their respective stock prices and could be negatively affected by business,
regulatory and other risks applicable to them.*
As
of June 30, 2021, we had an equity investment in OncoCyte, a U.S. publicly traded company. As of June 30, 2021, the value of our investment
in OncoCyte was approximately $6.4 million based on its closing stock price as of that date. If OncoCyte were to have delays in clinical
trials or commercialization activities or otherwise realize the specific business, regulatory and other risks applicable to them, the
value of its common stock and the valuation of our investment could be negatively affected. If OncoCyte were to fail and ultimately cease
operations, we may lose the entire value of our investment. In addition, the value of our marketable equity securities may be significantly
and 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.
Risks
Related to Government Regulation
We
may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws, including anti-kickback and false claims
laws, transparency laws, and health information privacy and security laws. If we are unable to comply, or have not fully complied, with
such laws, we could face substantial penalties.*
Our
current and future operations may be subject to various federal and state fraud and abuse laws, including, without limitation, the federal
Anti-Kickback Statute, the federal False Claims Act, and healthcare professional transparency laws and regulations. These laws may impact,
among other things, our research activities and our proposed sales, marketing, and education programs. In addition, we may be subject
to patient privacy regulation by both the federal government and the states in which we conduct our business. The laws that may affect
our ability to operate include:
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the
federal Anti-Kickback Statute, which prohibits, among other things, persons from knowingly and willfully soliciting, receiving, offering
or paying remuneration, directly or indirectly, to induce, or in return for, the purchase or recommendation of an item or service
reimbursable under a federal healthcare program, such as the Medicare and Medicaid programs;
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federal
civil and criminal false claims laws, including the federal False Claims Act, and civil monetary penalty laws, which prohibit, among
other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid,
or other third-party payors that are false or fraudulent;
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the
federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), which created new federal criminal statutes
that prohibit, among other things, executing a scheme to defraud any healthcare benefit program and making false statements relating
to healthcare matters;
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HIPAA,
as amended by the Health Information Technology for Economic and Clinical Health Act, (“HITECH”) and their implementing
regulations, which imposes certain requirements on “covered entities,” including certain healthcare providers, health
plans, and healthcare clearinghouses, as well as their respective “business associates” that create, receive, maintain
or transmit individually identifiable health information for or on behalf of a covered entity, and their subcontractors that use,
disclose, access, or otherwise process individually identifiable protected health information, relating to the privacy, security,
and transmission of individually identifiable health information;
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The
Physician Payments Sunshine Act which requires manufacturers of drugs, devices, biologics, and medical supplies to report annually
to the Centers for Medicare & Medicaid Services (“CMS”), information related to payments and other transfers of value
to physicians (defined to include doctors, dentists, optometrists, podiatrists, and chiropractors) and teaching hospitals, and ownership
and investment interests held by physicians and their immediate family members and applicable group purchasing organizations, and,
beginning in 2022 will require applicable manufacturers to report information regarding payments and other transfers of value provided
during the previous year to physician assistants, nurse practitioners, clinical nurse specialists, certified nurse anesthetists and
anesthesiologist assistants, and certified nurse-midwives; and
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state
law equivalents of each of the above federal laws, such as anti-kickback and false claims laws that may apply to items or services
reimbursed by any third-party payors, including commercial insurers, state laws that require pharmaceutical companies to comply with
the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal
government, or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state laws
that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare
providers, marketing expenditures, or drug pricing, state and local laws that require the registration of pharmaceutical sales representatives,
and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each
other in significant ways and may not have the same effect, thus complicating compliance efforts.
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Because
of the breadth of these laws and the narrowness of the statutory exceptions and regulatory safe harbors available, it is possible that
some of our business activities could be subject to challenge under one or more of such laws. In addition, recent health care reform
legislation has strengthened these laws.
If
our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply, we may
be subject to significant penalties, including administrative, civil and criminal penalties, damages, fines, disgorgement, exclusion
from participation in government health care programs, such as Medicare and Medicaid, integrity oversight and reporting obligations,
imprisonment, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our
business and our results of operations.
If
we do not receive regulatory approvals, we will not be permitted to sell our therapeutic and medical device products.
The
therapeutic and medical device products that we and our subsidiaries develop cannot be sold until the FDA and corresponding foreign regulatory
authorities approve the products for medical use. The need to obtain regulatory approval to market a new product means that:
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We
will have to conduct expensive and time-consuming clinical trials of new products. The full cost of conducting and completing clinical
trials necessary to obtain FDA and foreign regulatory approval of a new product cannot be presently determined but could exceed our
current financial resources.
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Clinical
trials and the regulatory approval process for a pharmaceutical or cell-based product can take several years to complete. As a result,
we will incur the expense and delay inherent in seeking FDA and foreign regulatory approval of new products, even if the results
of clinical trials are favorable.
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Data
obtained from preclinical and clinical studies is susceptible to varying interpretations and regulatory changes that could delay,
limit, or prevent regulatory agency approvals.
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Because
the therapeutic products we are developing with pluripotent stem cell technology involve the application of new technologies and
approaches to medicine, the FDA or foreign regulatory agencies may subject those products to additional or more stringent review
than drugs or biologics derived from other technologies.
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A
product that is approved may be subject to restrictions on use.
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The
FDA can recall or withdraw approval of a product, if it deems necessary.
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We
will face similar regulatory issues in foreign countries.
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Government-imposed
bans or restrictions and religious, moral, and ethical concerns about the use of hES cells could prevent us from developing and successfully
marketing stem cell products.
Government-imposed
bans or restrictions on the use of embryos or hES cells in research and development in the United States and abroad could generally constrain
stem cell research, thereby limiting the market and demand for our products. During March 2009, the federal government, pursuant to a
presidential executive order, lifted certain restrictions on federal funding of research involving the use of hES cells, and in accordance
with the executive order, the National Institutes of Health (“NIH”) has adopted guidelines for determining the eligibility
of hES cell lines for use in federally funded research. The central focus of the guidelines is to assure that hES cells used in federally
funded research were derived from human embryos that were created for reproductive purposes, were no longer needed for this purpose,
and were voluntarily donated for research purposes with the informed written consent of the donors. The hES cells that were derived from
embryos created for research purposes rather than reproductive purposes, and other hES cells that were not derived in compliance with
the guidelines, are not eligible for use in federally funded research. California law requires that stem cell research be conducted under
the oversight of a stem cell review oversight committee (“SCRO”). Many kinds of stem cell research, including the derivation
of new hES cell lines, may only be conducted in California with the prior written approval of the SCRO. A SCRO could prohibit or impose
restrictions on the research that we plan to do. The use of hES cells may give rise to religious, moral, and ethical issues. These considerations
could lead to more restrictive government regulations or could generally constrain stem cell research, thereby limiting the market and
demand for our products.
We
expect that the commercial opportunity for some of our products may depend on our ability to obtain and maintain reimbursement and continued
coverage from various payors, including government entities and insurance companies.*
If
these third-party payors do not consider our products to be cost-effective compared to other therapies, they may not cover our products
as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our products on a profitable
basis.
For
example, in the United States, healthcare providers are reimbursed for covered services and products they deliver through Medicare, Medicaid
and other government healthcare programs, as well as through private payers. No uniform policy for coverage and reimbursement exists
in the United States, and coverage and reimbursement can differ significantly from payor to payor. Decisions regarding whether to cover
any of our product candidates, if approved, the extent of coverage and amount of reimbursement to be provided are made on a plan-by-plan
basis. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement rates,
but also have their own methods and approval process apart from Medicare determinations. As a result, the coverage determination process
is often a time-consuming and costly process that will require us to provide scientific and clinical support for the use of our product
candidates to each payor separately, with no assurance that coverage and adequate reimbursement will be applied consistently or obtained
in the first instance. We may be required to provide specified rebates or discounts on the products we sell to certain government funded
programs, including Medicare and Medicaid, and those rebates or discounts have increased over time. The Patient Protection and Affordable
Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, the “ACA”), enacted in 2010, increased
many of the mandatory discounts and rebates and imposed a new branded prescription pharmaceutical manufacturers and importers fee payable
each year by certain manufacturers.
If
we are unable to establish or sustain coverage and adequate reimbursement for any product candidates from third-party payors, the adoption
of those products and sales revenue will be adversely affected, which, in turn, could adversely affect the ability to market or sell
those product candidates, if approved. Further, coverage policies and third-party payor reimbursement rates may change at any time. Therefore,
even if favorable coverage and reimbursement status is attained, less favorable coverage policies and reimbursement rates may be implemented
in the future.
We
face similar issues outside of the United States. In some non-U.S. jurisdictions, the proposed pricing for a drug must be approved before
it may be lawfully marketed. The requirements governing drug pricing vary widely from country to country. For example, the EU provides
options for its member states to restrict the range of medicinal products for which their national health insurance systems provide reimbursement
and to control the prices of medicinal products for human use. A member state may approve a specific price for the medicinal product,
or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on
the market. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products
will allow favorable reimbursement and pricing arrangements for any of our products. Historically, products launched in the EU do not
follow price structures of the United States and generally tend to be significantly lower.
Disruptions
at the FDA and other government agencies caused by funding shortages or global health concerns could negatively impact our business.
The
ability of the FDA to review and approve proposed clinical trials or new product candidates can be affected by a variety of factors,
including, but not limited to, government budget and funding levels, ability to hire and retain key personnel and accept the payment
of user fees, statutory, regulatory, and policy changes, and other events that may otherwise affect the FDA’s ability to perform
routine functions. Average review times at the agency have fluctuated in recent years as a result. In addition, government funding of
other government agencies that fund research and development activities is subject to the political process, which is inherently fluid
and unpredictable.
Disruptions
at the FDA and other agencies may also slow the time necessary for new product candidates to be reviewed and/or approved by necessary
government agencies, which would adversely affect our business. For example, over the last several years, including for 35 days beginning
on December 22, 2018, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough
critical FDA employees and stop critical activities.
Separately,
in response to the global COVID-19 pandemic, in March 2020, the FDA announced its intention to postpone most foreign inspections of manufacturing
facilities and temporarily postponed routine surveillance inspections of domestic manufacturing facilities. In July 2020 domestic inspections
restarted only on a risk-based basis. Regulatory authorities outside the United States may adopt similar restrictions or other policy
measures in response to the COVID-19 pandemic. If a prolonged government shutdown occurs, or if global health concerns continue to prevent
the FDA or other regulatory authorities from conducting their regular inspections, reviews, or other regulatory activities, it could
significantly impact the ability of the FDA or other regulatory authorities to timely review and process our regulatory submissions,
which could have a material adverse effect on our business.
The
ACA and future changes to that law may adversely affect our business.*
As
a result of the adoption of the ACA, in the United States, substantial changes have been made to the system for paying for healthcare
in the United States. Among the ACA’s provisions of importance to our industry are that it:
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created
the branded prescription pharmaceutical manufacturers and importers annual fee;
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increased
the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program, to 23.1% and 13% of the average manufacturer
price for most branded and generic drugs, respectively and capped the total rebate amount for innovator drugs at 100% of the Average
Manufacturer Price. However, on March 11, 2021, President Biden signed the American Rescue Plan Act of 2021 into law, which eliminates
the statutory Medicaid drug rebate cap for single source and innovator multiple source drugs, beginning January 1, 2024;
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created
new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for certain drugs and
biologics that are inhaled, infused, instilled, implanted or injected;
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extended
manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care
organizations;
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expanded
eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals
and by adding new mandatory eligibility categories for individuals with income at or below 133% of the federal poverty level, thereby
potentially increasing manufacturers’ Medicaid rebate liability;
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expanded
the entities eligible for discounts under the Public Health program;
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created
a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness
research, along with funding for such research;
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established
a Center for Medicare & Medicaid Innovation at CMS to test innovative payment and service delivery models to lower Medicare and
Medicaid spending, potentially including prescription drug spending; and
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created
a licensure framework for follow on biologic products.
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There
have been executive, judicial and Congressional challenges to certain aspects of the ACA. While Congress has not passed comprehensive
repeal legislation, it has enacted laws that modify certain provisions of the ACA such as removing penalties, starting January 1, 2019,
for not complying with the ACA’s individual mandate to carry health insurance, and eliminating the implementation of certain ACA-mandated
fees. For example, on June 17, 2021, the United States Supreme Court dismissed a challenge on procedural grounds that argued the ACA
is unconstitutional in its entirety because the “individual mandate” was repealed by Congress. Thus, the ACA will remain
in effect in its current form. Moreover, prior to the United States Supreme Court ruling, on January 28, 2021, President Biden issued
an executive order that initiated a special enrollment period for purposes of obtaining health insurance coverage through the ACA marketplace,
which began February 15, 2021 and will remain open through August 15, 2021. The executive order also instructed certain governmental
agencies to review and reconsider their existing policies and rules that limit access to healthcare, including among others, reexamining
Medicaid demonstration projects and waiver programs that include work requirements, and policies that create unnecessary barriers to
obtaining access to health insurance coverage through Medicaid or the ACA. It is possible that the ACA will be subject to judicial or
Congressional challenges in the future. It is unclear how any such challenges, other litigation, and the healthcare reform measures of
the Biden administration will impact the ACA.
In
addition, other legislative changes have been proposed and adopted since the ACA was enacted. For example, the Budget Control Act of
2011, includes reductions to Medicare payments to providers of 2% per fiscal year, which went into effect on April 1, 2013 and, due to
subsequent legislative amendments to the statute, will remain in effect through 2030, with the exception of a temporary suspension from
May 1, 2020 through December 31, 2021, unless additional Congressional action is taken. On January 2, 2013, the American Taxpayer Relief
Act of 2012 was signed into law, which, among other things, reduced Medicare payments to several providers, including hospitals, and
increased the statute of limitations period for the government to recover overpayments to providers from three to five years.
Further,
there has been heightened governmental scrutiny in the United States of pharmaceutical pricing practices in light of the rising cost
of prescription drugs and biologics. Such scrutiny has resulted in several recent congressional inquiries and proposed and enacted federal
and state legislation designed to, among other things, bring more transparency to product pricing, review the relationship between pricing
and manufacturer patient programs, and reform government program reimbursement methodologies for products. At the federal level, the
Trump administration used several means to propose or implement drug pricing reform, including through federal budget proposals, executive
orders and policy initiatives. For example, on July 24, 2020 and September 13, 2020, the Trump administration announced several executive
orders related to prescription drug pricing that attempted to implement several of the administration’s proposals. As a result,
the FDA released a final rule on September 24, 2020, effective November 30, 2020, providing guidance for states to build and submit importation
plans for drugs from Canada. Further, on November 20, 2020, the U.S. Department of Health & Human Services finalized a regulation
removing safe harbor protection for price reductions from pharmaceutical manufacturers to plan sponsors under Medicare Part D, either
directly or through pharmacy benefit managers, unless the price reduction is required by law. The implementation of the rule has been
delayed by the Biden administration from January 1, 2022 to January 1, 2023 in response to ongoing litigation. The rule also creates
a new safe harbor for price reductions reflected at the point-of-sale, as well as a new safe harbor for certain fixed fee arrangements
between pharmacy benefit managers and manufacturers, the implementation of which have also been delayed by the Biden administration until
January 1, 2023. On November 20, 2020, CMS issued an interim final rule implementing President Trump’s Most Favored Nation executive
order, which would tie Medicare Part B payments for certain physician-administered drugs to the lowest price paid in other economically
advanced countries. The Most Favored Nation regulations mandate participation by identified Medicare Part B providers and will apply
in all U.S. states and territories for a seven-year period beginning January 1, 2021, and ending December 31, 2027. On December 28, 2020,
the United States District Court for the Northern District of California issued a nationwide preliminary injunction against implementation
of the interim final rule. On January 13, 2021, in a separate lawsuit brought by industry groups in the United States District Court
of Maryland, the government defendants entered a joint motion to stay litigation on the condition that the government would not appeal
the preliminary injunction granted in the United States District Court for the Northern District of California and that performance for
any final regulation stemming from the Most Favored Nation Model interim final rule shall not commence earlier than sixty (60) days after
publication of that regulation in the Federal Register. Additionally, based on a recent executive order, the Biden administration expressed
its intent to pursue certain policy initiatives to reduce drug prices. At the state level, legislatures have increasingly passed legislation
and implemented regulations designed to control pharmaceutical product pricing, including price or patient reimbursement constraints,
discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed
to encourage importation from other countries and bulk purchasing.
In
addition, it is possible that additional governmental action is taken to address the COVID-19 pandemic.
If
we fail to comply with the extensive legal and regulatory requirements affecting the health care industry, we could face increased costs,
penalties and a loss of business.
Our
activities, and the activities of our collaborators, distributors and other third-party providers, are subject to extensive government
regulation and oversight both in the U.S. and in foreign jurisdictions. The FDA and comparable agencies in other jurisdictions will directly
regulate many of our most critical business activities, including the conduct of preclinical and clinical studies, product manufacturing,
advertising and promotion, product distribution, adverse event reporting and product risk management. Our interactions in the U.S. or
abroad with physicians and other health care providers that may prescribe or purchase our products are also subject to government regulation
designed to prevent fraud and abuse in the sale and use of the products and place greater restrictions on the marketing practices of
health care companies. Health care companies are facing heightened scrutiny of their relationships with health care providers from anti-corruption
enforcement officials. In addition, health care companies have been the target of lawsuits and investigations alleging violations of
government regulation, including claims asserting submission of incorrect pricing information, impermissible off-label promotion of pharmaceutical
products, payments intended to influence the referral of health care business, submission of false claims for government reimbursement,
antitrust violations or violations related to environmental matters. Risks relating to compliance with laws and regulations may be heightened
as we bring products to the market globally.
Regulations
governing the health care industry are subject to change, with possibly retroactive effect, including:
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new
laws, regulations or judicial decisions, or new interpretations of existing laws, regulations or decisions, related to health care
availability, pricing or marketing practices, compliance with wage and hour laws and other employment practices, method of delivery,
payment for health care products and services, compliance with health information and data privacy and security laws and regulations,
tracking and reporting payments and other transfers of value made to physicians and teaching hospitals, extensive anti-bribery and
anti-corruption prohibitions, product serialization and labeling requirements and used product take-back requirements;
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changes
in the FDA and foreign regulatory approval processes that may delay or prevent the approval of new products and result in lost market
opportunity;
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requirements
that provide for increased transparency of clinical trial results and quality data, such as the EMA’s clinical transparency
policy, which could impact our ability to protect trade secrets and competitively sensitive information contained in approval applications
or could be misinterpreted leading to reputational damage, misperception or legal action which could harm our business; and
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changes
in FDA and foreign regulations that may require additional safety monitoring, labeling changes, restrictions on product distribution
or use, or other measures after the introduction of our products to market, which could increase our costs of doing business, adversely
affect the future permitted uses of approved products, or otherwise adversely affect the market for our products.
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Violations
of governmental regulation may be punishable by criminal and civil sanctions against us, including fines and civil monetary penalties
and exclusion from participation in government programs, including Medicare and Medicaid, as well as against executives overseeing our
business. In addition to penalties for violation of laws and regulations, we could be required to repay amounts we received from government
payors or pay additional rebates and interest if we are found to have miscalculated the pricing information we have submitted to the
government. We cannot ensure that our compliance controls, policies and procedures will in every instance protect us from acts committed
by our employees, collaborators, partners or third-party providers that would violate the laws or regulations of the jurisdictions in
which we operate. Whether or not we have complied with the law, an investigation into alleged unlawful conduct could increase our expenses,
damage our reputation, divert management time and attention and adversely affect our business.
Even
if we receive approval for our products, we may be subject to extensive regulatory obligations in order to commercialize our products.
Even
after initial FDA or foreign regulatory agency approval has been obtained, further studies may be required to provide additional data
on safety or to gain approval for the use of a product as a treatment for clinical indications other than those initially targeted. Use
of a product during testing and after marketing could reveal side effects that could delay, impede, or prevent marketing approval, result
in a regulatory agency-ordered product recall, or in regulatory agency-imposed limitations on permissible uses or in withdrawal of approval.
For example, if the FDA or foreign regulatory agency becomes aware of new safety information after approval of a product, it may require
us to conduct further clinical trials to assess a known or potential serious risk and to assure that the benefit of the product outweigh
the risks. If we are required to conduct such a post-approval study, periodic status reports must be submitted to the FDA or foreign
regulatory agency. Failure to conduct such post-approval studies in a timely manner may result in substantial civil or criminal penalties.
Data resulting from these clinical trials may result in expansions or restrictions to the labeled indications for which a product has
already been approved. Any of these requirements or actions may negatively impact our business or operations.
If
we are deemed to be an investment company, we may have to institute burdensome compliance requirements and our activities may be restricted.
An
entity that, among other things, is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business
of investing, reinvesting, owning, trading or holding certain types of securities would be deemed an investment company under the Investment
Company Act of 1940, as amended (the “1940 Act”). Based on the securities we hold, including our equity ownership in publicly
traded companies, we may not meet the requirements for an exemption promulgated under the 1940 Act. If we are deemed to be an investment
company under the 1940 Act, we would be subject to additional limitations on operating our business, including limitations on the issuance
of securities, which may make it difficult for us to raise capital.
Risks
Related to Our Clinical Development and Commercial Operations
Clinical
studies are costly, time consuming and are subject to risks that could delay or prevent commercialization of our current or future product
candidates.
We
cannot guarantee that any clinical studies will be conducted as planned or completed on schedule, if at all. A failure of one or more
clinical studies can occur at any stage of development. Events that may prevent successful or timely completion of clinical development
include but are not limited to:
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inability
to generate satisfactory preclinical, toxicology, or other in vivo or in vitro data or diagnostics to support the initiation
or continuation of clinical studies necessary for product approval;
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delays
in securing clinical investigators and agreeing on acceptable terms with contract research organizations (“CROs”) and
clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among CROs and clinical
trial sites;
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delays
in obtaining required Institutional Review Board (“IRB”) approval at each clinical trial site;
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failure
to obtain permission from regulatory authorities to conduct a clinical trial after review of an investigational new drug (“IND”)
or equivalent foreign application or amendment;
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slower
than anticipated rates of patient recruitment and enrollment (including as a result of actual or threatened public health emergencies
and outbreaks of disease such as the current COVID-19 pandemic), failing to reach the targeted number of patients due to competition
for patients from other trials, or patients dropping out of our clinical studies once enrolled;
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failure
by clinical sites or our CROs or other third parties to adhere to clinical trial requirements or report complete findings;
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failure
to perform the clinical studies in accordance with the FDA’s good clinical practices requirements or applicable foreign regulatory
guidelines;
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occurrence
of adverse events associated with our product candidates or with product candidates of third parties that may have characteristics
similar to or perceived to be similar to our product candidates;
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negative
or inconclusive results from our clinical trials which may result in our deciding, or regulators requiring us, to conduct additional
clinical studies or to curtail or abandon development programs for a product candidate;
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unforeseen
side effects, possibly resulting in the FDA or other regulatory authorities denying approval of our product candidates;
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approval
and introduction of new therapies or changes in standards of practice or regulatory guidance that render our clinical trial endpoints
or the targeting of our proposed indications obsolete;
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inability
to monitor patients adequately during or after treatment or problems with investigator or patient compliance with the trial protocols;
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inability
or unwillingness of medical investigators to follow our clinical protocols;
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unavailability
of clinical trial supplies;
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inability
to use clinical trial results from foreign jurisdictions to support U.S. regulatory approval;
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changes
in regulatory requirements and guidance that require amending or submitting new clinical protocols;
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the
cost of clinical studies of our product candidates; and
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delays
in agreeing on acceptable terms with third-party manufacturers and the time for manufacture of sufficient quantities of our product
candidates for use in clinical studies.
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Any
inability to successfully complete clinical development and obtain regulatory approval could result in additional costs to us or impair
our ability to generate revenue. Clinical trial delays could also shorten any periods during which our products have patent protection
and may allow competitors to develop and bring products to market before we do and may harm our business and results of operations.
Clinical
and preclinical drug development involves a lengthy and expensive process with an uncertain outcome. The results of early preclinical
trials and clinical trials of our product candidates are not necessarily predictive of future results. Our product candidates may not
have favorable results in later clinical trials, if any, or receive regulatory approval on a timely basis, if at all.
Clinical
and preclinical drug development is expensive and can take many years to complete, and its outcome is inherently uncertain. Our clinical
trials may not be conducted as planned or completed on schedule, if at all, and failure can occur at any time during the preclinical
trial or clinical trial process. All of our product candidates will require substantial additional development, and no assurances can
be given that the development of any of our product candidates will ultimately be successful. Although we may from time to time disclose
results from preclinical testing or preliminary data or interim results from our clinical studies of our product candidates, and earlier
clinical studies, including clinical studies with similar product candidates, these are not necessarily predictive of future results,
including clinical trial results. The historical failure rate for product candidates in our industry is high.
The
results of our current and future clinical trials may differ from results achieved in earlier preclinical and clinical studies for a
variety of reasons, including:
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we
may not demonstrate the potency and efficacy benefits observed in previous studies;
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our
efforts to improve, standardize and automate the manufacture of our product candidates, including OpRegen®,
OPC1 and VAC2, and any resulting deviations in the manufacture of our product candidates, may adversely affect the safety, purity,
potency or efficacy of such product candidates;
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differences
in trial design, including differences in size, eligibility criteria, and patient populations;
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advancements
in the standard of care may affect our ability to demonstrate efficacy or achieve trial endpoints in our current or future clinical
trials;
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safety
issues or adverse events in patients that enroll in our current or future clinical trials; and
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results
in preclinical and clinical tests may not be repeated in subsequent tests or be predictive of future results.
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On
June 1, 2021, we provided an update to the fully enrolled 24 patient Phase 1/2a open-label trial for OpRegen. Data presented showed that
restoration of retinal tissue previously report in one subject had been observed in two additional Cohort 4 patients, increasing the
total to three patients who integrated new RPE cells, and layers of retinal tissue in areas that previously showed no presence of any
of these cells. All three patient’s visual acuity increased above baseline levels within 6 months post-transplant. The best corrected
visual acuity of the better vision Cohort 4 patients has improved or remained stable in 10/12 (83%) and these patients are being closely
monitored for additional evidence of clinical benefit. The totality of these findings supports the view that atrophic AMD is not an irreversible
degenerative condition. OpRegen has been well tolerated with no unexpected adverse events, and evidence of durable engraftment of OpRegen
RPE cells have extended to more than 5 years post-transplant in earliest treated patients. However, we do not know how OpRegen will perform
in future clinical trials.
It
is not uncommon to observe results in clinical trials that are unexpected based on preclinical trials and early clinical trials, and
many product candidates fail in clinical trials despite very promising early results. Moreover, preclinical and clinical data may be
susceptible to varying interpretations and analyses. A number of companies in the biotechnology industry have suffered significant setbacks
in clinical development even after achieving promising results in earlier studies.
Further,
as a result of the COVID-19 pandemic, if patients drop out of our clinical trials, miss scheduled doses or follow-up visits or otherwise
fail to follow clinical trial protocols, or if our clinical trials are otherwise disrupted due to COVID-19 or actions taken to slow its
spread, the integrity of data from our clinical trials may be compromised or not accepted by the FDA or other regulatory authorities,
which would represent a significant setback for the applicable program.
Even
if our current and planned clinical trials are successful, we will need to conduct additional clinical trials, which may include registrational
trials, trials in additional patient populations or under different treatment conditions, and trials using different manufacturing protocols,
processes, materials or facilities or under different manufacturing conditions, before we are able to seek approvals for our product
candidates from the FDA and regulatory authorities outside the United States to market and sell these product candidates. Our failure
to meet the requirements to support marketing approval for our product candidates in our ongoing and future clinical trials would substantially
harm our business and prospects. For the foregoing reasons, our ongoing and planned clinical trials may not be successful, which could
have a material adverse effect on our business, financial condition and results of operations.
Interim,
topline and preliminary data from our clinical trials that we announce or publish from time to time may change as more patient data become
available and are subject to audit and verification procedures that could result in material changes in the final data.
From
time to time, we may publicly disclose preliminary or topline data from our clinical trials, which is based on a preliminary analysis
of then-available data, and the results and related findings and conclusions are subject to change following a more comprehensive review
of the data related to the particular trial. We also make assumptions, estimations, calculations and conclusions as part of our analyses
of data, and we may not have received or had the opportunity to fully and carefully evaluate all data. As a result, the topline results
that we report may differ from future results of the same studies, or different conclusions or considerations may qualify such results,
once additional data have been received and fully evaluated. Topline data also remain subject to audit and verification procedures that
may result in the final data being materially different from the preliminary data we previously published. As a result, topline data
should be viewed with caution until the final data are available. From time to time, we may also disclose interim data from our clinical
trials. Interim data from clinical trials that we may complete are subject to the risk that one or more of the clinical outcomes may
materially change as patient enrollment continues and more patient data become available. Adverse differences between preliminary or
interim data and final data could significantly harm our business prospects.
Further,
others, including regulatory agencies, may not accept or agree with our assumptions, estimates, calculations, conclusions or analyses
or may interpret or weigh the importance of data differently, which could impact the value of the particular program, the approvability
or commercialization of the particular product candidate or product and our company in general. In addition, the information we choose
to publicly disclose regarding a particular trial is based on what is typically extensive information, and you or others may not agree
with what we determine is the material or otherwise appropriate information to include in our disclosure, and any information we determine
not to disclose may ultimately be deemed significant with respect to future decisions, conclusions, views, activities or otherwise regarding
a particular product candidate or our business. If the topline data that we report differ from actual results, or if others, including
regulatory authorities, disagree with the conclusions reached, our ability to obtain approval for, and commercialize, our product candidates
may be harmed, which could harm our business, operating results, prospects or financial condition.
Because
we have multiple cell therapy programs in clinical development, we may expend our limited resources to pursue a particular product candidate
and fail to capitalize on product candidates that may be more profitable or for which there is a greater likelihood of success.
We
have three cell therapy programs in clinical development. OpRegen is currently in a Phase 1/2a multicenter clinical trial for the treatment
of dry AMD, OPC-1 is currently in a Phase 1/2a clinical trial for subacute spinal cord injuries, and VAC2 is in a Phase 1 clinical trial
in non-small cell lung cancer. As a result of these and other future clinical trials for these product candidates or any of our future
product candidates may make our decision as to which product candidates to focus on more difficult and we may forgo or delay pursuit
of opportunities with other product candidates that could have had greater commercial potential or likelihood of success.
Our
resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our
spending on current and future research and development programs and product candidates may not yield any commercially viable products.
If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable
rights to that product candidate through future collaborations, licenses and other similar arrangements in cases in which it would have
been more advantageous for us to retain sole development and commercialization rights to such product candidate.
Additionally,
we may pursue additional in-licenses or acquisitions of development-stage assets or programs, which entails additional risk to us. Identifying,
selecting and acquiring promising product candidates requires substantial technical, financial and human resources expertise. Efforts
to do so may not result in the actual acquisition or license of a particular product candidate, potentially resulting in a diversion
of our management’s time and the expenditure of our resources with no resulting benefit. For example, if we are unable to identify
programs that ultimately result in approved products, we may spend material amounts of our capital and other resources evaluating, acquiring
and developing products that ultimately do not provide a return on our investment.
The
commercial success of any of our current or future product candidates will depend upon the degree of market acceptance by physicians,
patients, third-party payors, other health care providers and others in the medical community.
Even
if a product candidate obtains regulatory approval, its commercial success will depend in part on physicians, patients, third-party payors,
other health care providers and others in the medical community accepting our product candidates as medically useful, cost-effective,
and safe. Any product we bring to the market may not gain market acceptance by such parties. The degree of market acceptance of any of
our products will depend on several factors, including without limitation:
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the
efficacy of the product as demonstrated in clinical trials and potential advantages over competing treatments;
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the
prevalence and severity of the disease and any side effects;
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the
clinical indications for which approval is granted, including any limitations or warnings contained in a product’s approved
labeling;
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the
convenience and ease of administration;
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the
cost of treatment, particularly as additive to existing treatments;
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the
willingness of the patients and physicians to accept and use these therapies;
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the
marketing, sales and distribution support for the products;
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the
publicity concerning our products or competing products and treatments; and
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the
pricing and availability of coverage and adequate reimbursement by third-party payors and government authorities.
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Even
if a product displays a favorable efficacy and safety profile upon approval, market acceptance of the product will be uncertain. Efforts
to educate the medical community and third-party payors on the benefits of the products may require significant investment and resources
and may never succeed. If our products fail to achieve an adequate level of acceptance by physicians, patients, third-party payors, other
health care providers and others in the medical community, we will not be able to generate sufficient revenue to become or remain profitable.
If
the market opportunities for our product candidates are smaller than we believe and estimate they are, we may not meet our revenue expectations
and our business may suffer.
Our
projections of the number of potential users in the markets we are attempting to address are based on our beliefs and estimates. Our
estimates have been derived from a variety of sources, including market research and publications and scientific literature estimating
the total number of potential patients and currently approved or used therapies. Our estimates are also based on assumptions regarding
the potential size of the market assuming broad regulatory approval or potential usage by physicians beyond the approved label. Any of
our estimates may prove to be incorrect. The scope of approval and potential use of any product candidate may be significantly narrower,
and the number of patients may turn out to be lower than expected. Competitive products or approaches may be approved or come into use
and the potentially addressable patient population for each of our product candidates may be limited or may not be amenable to treatment
with our product candidates, and new patients may become increasingly difficult to identify or gain access to, any which could adversely
affect our results of operations and our business.
Sales
of the products we may develop will be adversely affected by the availability of competing products.
Our
products and product candidates will face substantial competition, whether through the development of safer and more effective alternatives
to our products, lower costs to administer than our products or other forms of competition such as more favorable distribution, reimbursement
and pricing or formulary and health care provider acceptance.
The
cell therapy industry is characterized by rapidly evolving technology and intense competition. Our competitors include major multinational
pharmaceutical companies, specialty biotechnology companies, and chemical and medical products companies operating in the fields of regenerative
medicine, cell therapy, tissue engineering, and tissue regeneration. Many of these companies are well established and possess technical,
research and development, financial, and sales and marketing resources significantly greater than ours. In addition, certain smaller
biotechnology companies have formed strategic collaborations, partnerships, and other types of joint ventures with larger, well-established
industry competitors that afford the smaller companies’ potential research and development as well as commercialization advantages.
Academic institutions, governmental agencies, and other public and private research organizations are also conducting and financing research
activities, which may produce products directly competitive to those we are developing.
We
believe that some of our competitors are trying to develop pluripotent cells and human embryonic progenitor cell (“hEPC”)
based technologies and products that may compete with our stem cell products based on efficacy, safety, cost, and intellectual property
positions. Ocata, which was acquired by a subsidiary of Astellas Pharma Inc., and Retinal Patch Technologies Inc. are conducting clinical
trials of hES cell products designed to treat age-related macular degeneration. If their products are proven to be safe and effective,
they may reach the market ahead of OpRegen.
We
may also face competition from companies that have filed patent applications relating to the propagation and differentiation of stem
cells. Those companies include Ocata, which in 2015 had certain U.S. patents issue with claims directed to methods of producing RPE cells
and isolating and purifying such cells. We may be required to seek licenses from these competitors in order to commercialize certain
products proposed by us, and such licenses may not be granted.
Competitive
products may make any products we develop obsolete or noncompetitive before we recover the expense of developing and commercializing
our product candidates. If we are unable to compete effectively, our opportunity to generate revenue from the sale of our products we
may develop, if approved, could be adversely affected.
We
will face risks related to our own manufacturing capabilities and those related to our reliance on third parties to manufacture products,
including those related to product acquisition costs, production delays, and supply shortages that could impair our ability to complete
the development and commercialization of our product candidates.
The
manufacture of medical products is complex and requires significant expertise and capital investment, including the development of advanced
manufacturing techniques and process controls. Although we have manufacturing capability through Cell Cure for OpRegen, OPC1, and VAC2
in Israel, we will need greater manufacturing capacity if we are to successfully commercialize our products. Unless we can raise the
capital required to construct our own commercial scale manufacturing facilities and can develop the expertise to manage and operate a
manufacturing facility of our own, we may need to rely on third-party manufacturers to manufacture any products we develop. There is
no assurance that we will be able to identify manufacturers on acceptable terms or at all. Regardless of whether we do our own manufacturing
or rely on third parties to manufacture products for us, we will face risks related to the manufacture of our products including these
risks:
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We
or any third-party manufacturers might not timely formulate and manufacture our products or produce the quantity and quality required
to meet our clinical and commercial needs, if any.
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We
or any third-party manufacturers may not execute our manufacturing procedures appropriately.
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Any
third-party manufacturers we engage may not perform as agreed or may not remain in the contract manufacturing business for the time
required to supply our clinical trials or to successfully produce, store and distribute our products on a commercial scale.
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We
or any third-party manufacturers will be subject to ongoing periodic unannounced inspection by the FDA and corresponding state agencies
to ensure strict compliance with current good manufacturing practices (“cGMP”), and other government regulations and
corresponding foreign standards. We will not have control over third-party manufacturers’ compliance with applicable regulations
and standards.
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We
may not own, or may have to share, the intellectual property rights to any improvements made by our third-party manufacturers in
the manufacturing process for our product candidates.
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We
may not obtain licenses for third-party intellectual property rights needed by manufacturers to produce our products.
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Third-party
manufacturers could breach or terminate their agreements with us.
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We
or third-party manufacturers may experience manufacturing difficulties as a result of resource constraints, labor disputes, unstable
political environments, natural disasters, public health crises such as pandemics and epidemics, political crises such as terrorism,
war, political insecurity or other conflict, or other events outside of our or our third-party manufacturers control (including as
a result of actual or threatened public health emergencies and outbreaks of disease such as the current COVID-19 pandemic). This
may result in business closures that affect us and our third-party manufacturers.
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In
addition, we may rely on third parties to perform release testing on our product candidates prior to delivery to patients. If these tests
are not appropriately conducted and test data are not reliable, patients could be put at risk of serious harm which could result in product
liability suits.
If
we or any third-party manufacturers we may engage were to encounter any of these difficulties, our ability to provide our product candidates
to patients in clinical trials or to the medical marketplace would be jeopardized. Any delay or interruption in the supply of clinical
trial supplies could delay the completion of clinical trials, increase the costs associated with maintaining clinical trial programs
and, depending upon the period of delay, could require us to either commence new clinical trials at additional expense or terminate clinical
trials completely. Each risk could delay our clinical trials, any approval of our product candidates by the FDA, or the commercialization
of our product candidates, and could result in higher costs or deprive us of potential product revenue.
Any
cell-based products that receive regulatory approval may be difficult and expensive to manufacture profitably.
Cell-based
products are among the more expensive biologic products to manufacture in accordance with cGMP. We do not yet have sufficient information
to reliably estimate the cost of commercially manufacturing any of our product candidates. Excessive manufacturing costs could make our
product candidates too expensive to compete in the medical market place with alternative products manufactured by our competitors or
might result in third party payors such as health insurers and Medicare, declining to cover our products or setting reimbursement levels
too low for us to earn a profit from the commercialization of one or more of our products.
We
may not secure a commercialization partner for Renevia.
In
September 2019, Renevia was granted a CE Mark and Class III classification with an intended use in adults as a resorbable matrix for
the delivery of autologous adipose tissue preparations to restore and/or augment facial volume after subcutaneous fat volume loss for
the treatment of facial lipoatrophy. We continue to seek a commercialization partner in the European Union but we can give no assurance
that we will secure a partner or commercialize Renevia in any territory.
The
ongoing COVID-19 pandemic has affected and may adversely affect our operations, including the conduct of our clinical trials.*
In
December 2019, a novel strain of coronavirus and the resulting illness known as COVID-19 emerged in Wuhan, China. The outbreak has now
spread to other countries and has been declared a pandemic by the World Health Organization.
The
COVID-19 pandemic has resulted in travel and other restrictions in order to reduce the spread of the disease, including a California
executive order and several other state and local orders across the country, which, among other things, direct individuals to shelter
at their places of residence, direct businesses and governmental agencies to cease non-essential operations at physical locations, prohibit
certain non-essential gatherings, and order cessation of non-essential travel. In response to these public health directives and orders,
we have implemented work-from-home policies for our employees. The effects of the executive order, the shelter-in-place order and our
work-from-home policies may negatively impact productivity, disrupt our business and delay our clinical programs and timelines, the magnitude
of which will depend, in part, on the length and severity of the restrictions and other limitations on our ability to conduct our business
in the ordinary course. These and similar, and perhaps more severe, disruptions in our operations could negatively impact our business,
operating results and financial condition.
As
COVID-19 continues to impact the United States and Israel, we have experienced and may continue to experience disruptions that could
adversely affect our operations and clinical trials, including:
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delays
or difficulties in enrolling, or conducting follow-up visits with, patients in our clinical trials, particularly patients for our
OpRegen Phase 1/2a clinical trial, who are older and who may be at higher risk of complications from COVID-19;
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delays
or difficulties in clinical site initiation, including difficulties in recruiting clinical site investigators and staff;
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diversion
of healthcare resources away from the conduct of clinical trials;
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interruption
of key clinical trial activities, such as clinical trial site monitoring, due to limitations on travel;
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limited
availability of our employees and the staff of our current clinical sites due to sickness or social distancing measures;
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manufacturing
difficulties for us and our suppliers of raw materials caused by business closures;
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delays
in clinical sites receiving the supplies and materials needed to conduct our clinical trials, including interruption in global shipping
that may affect the transport of clinical trial materials;
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changes
in local regulations as part of a response to the COVID-19 outbreak which may require us to change the ways in which our clinical
trials are conducted, which may result in unexpected costs, or to discontinue the clinical trials altogether;
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interruption
or delays in the operations of the FDA or other regulatory authorities, which may impact review and approval timelines;
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risk
that participants enrolled in our clinical trials will acquire COVID-19 while the clinical trial is ongoing, which could impact the
results of the clinical trial, including by increasing the number of observed adverse events; and
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refusal
of the FDA to accept data from clinical trials in affected geographies.
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These
and other disruptions in our operations and the global economy could negatively impact our business, operating results and financial
condition. The extent to which the COVID-19 pandemic affects our operations will depend on future developments, which are highly uncertain
and cannot be predicted with confidence, including the duration and severity of the pandemic, and the actions that may be required to
contain the COVID-19 pandemic or treat its impact.
Our clinical trials have
been, and may in the future be, affected by the COVID-19 pandemic. For example, the COVID-19 pandemic previously impacted patient enrollment
in our OpRegen Phase 1/2a multicenter clinical trial and is currently affecting the VAC2 Phase 1 multicenter clinical trial. In particular,
some sites paused enrollment to focus on, and direct resources to, the COVID-19 pandemic or adhere to national or local guidelines, while
at other sites, patients may decide not to enroll or continue participating in follow-up visits as part of the ongoing clinical trial,
as a result of the pandemic. We are unable to predict with confidence the duration of such patient enrollment delays or missed study
visits, as the COVID-19 pandemic continues or gets worse. If patient enrollment or study follow-up is delayed for an extended period
of time, our clinical trials could be delayed or otherwise adversely affected. Our inability to enroll or follow a sufficient number
of patients for any of our current or future clinical trials could result in significant delays or may require us to abandon one or more
clinical trials altogether.
Our
ongoing or planned clinical trials may also be impacted by interruptions or delays in the operations of the FDA and comparable foreign
regulatory agencies.
In
addition, quarantines, shelter-in-place and similar government orders, or the perception that such orders, shutdowns or other restrictions
on the conduct of business operations could occur, related to COVID-19 or other infectious diseases could impact personnel at our CROs
or third-party manufacturing facilities upon which we rely, or the availability or cost of materials, which could disrupt the supply
chain for our product candidates. To the extent our suppliers and service providers are unable to comply with their obligations under
our agreements with them or they are otherwise unable to deliver or are delayed in delivering goods and services to us due to the COVID-19
pandemic, our ability to continue meeting clinical supply demand for our product candidates or otherwise advancing development of our
product candidates may become impaired.
The
spread of COVID-19 and actions taken to reduce its spread may also materially affect us economically. While the potential economic impact
brought by, and the duration of, the COVID-19 pandemic may be difficult to assess or predict, there could be a significant disruption
of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity and financial
position. In addition, the trading prices for other biotechnology companies have been volatile as a result of the COVID-19 pandemic.
As a result, we may face difficulties raising capital through sales of our common shares or such sales may be on unfavorable terms.
COVID-19
and actions taken to reduce its spread continue to rapidly evolve. The extent to which COVID-19 may impede the development of our product
candidates, reduce the productivity of our employees, disrupt our supply chains, delay our clinical trials, reduce our access to capital
or limit our business development activities, will depend on future developments, which are highly uncertain and cannot be predicted
with confidence.
In
addition, to the extent the ongoing COVID-19 pandemic adversely affects our business and results of operations, it may also have the
effect of heightening many of the other risks and uncertainties described in this ‘‘Risk Factors’’ section.
The
withdrawal of the United Kingdom (the “U.K.”) from the EU, commonly referred to as “Brexit,” may adversely impact
our ability to obtain regulatory approvals of our product candidates in the EU and the U.K., result in restrictions or imposition of
taxes and duties for importing our product candidates into the EU and the U.K., and may require us to incur additional expenses in order
to develop, manufacture and commercialize our product candidates in the EU and the U.K.*
Following
the result of a referendum in 2016, the U.K. left the EU on January 31, 2020, commonly referred to as Brexit. Pursuant to the formal
withdrawal arrangements agreed between the U.K. and the EU, the U.K. was subject to a transition period until December 31, 2020 (the
“Transition Period”) during which EU rules continued to apply. A trade and cooperation agreement (the “Trade and Cooperation
Agreement”) that outlines the future trading relationship between the United Kingdom and the European Union was agreed in December
2020.
Since
a significant proportion of the regulatory framework in the U.K. applicable to our business and our product candidates is derived from
EU directives and regulations, Brexit has had, and may continue to have, a material impact upon the regulatory regime with respect to
the development, manufacture, importation, approval and commercialization of our product candidates in the U.K. or the EU. For example,
Great Britain is no longer covered by the centralized procedures for obtaining EU-wide marketing authorization from the European Medicines
Agency and a separate process for authorization of drug products, including our product candidates, will be required in Great Britain.
It is currently unclear whether the Medicines & Healthcare products Regulatory Agency in the
U.K. is sufficiently prepared to handle the increased volume of marketing authorization applications that it is likely to receive. Any
delay in obtaining, or an inability to obtain, any marketing approvals, as a result of Brexit or otherwise, would prevent us from commercializing
our product candidates in the U.K. or the EU and restrict our ability to generate revenue and achieve and sustain profitability.
While
the Trade and Cooperation Agreement provides for the tariff-free trade of medicinal products between the U.K. and the EU, there may be
additional non-tariff costs to such trade which did not exist prior to the end of the Transition Period. Further, should the U.K. diverge
from the EU from a regulatory perspective in relation to medicinal products, tariffs could be put into place in the future. We could
therefore, both now and in the future, face significant additional expenses (when compared to the position prior to the end of the Transition
Period) to operate our business, which could significantly and materially harm or delay our ability to generate revenues or achieve profitability
of our business. Any further changes in international trade, tariff and import/export regulations as a result of Brexit or otherwise
may impose unexpected duty costs or other non-tariff barriers on us. These developments, or the perception that any of them could occur,
may significantly reduce global trade and, in particular, trade between the affected nations and the U.K.
We
face potential product liability, and, if successful claims are brought against us, we may incur substantial liability and costs. If
the use or misuse of our products or product candidates harm patients or is perceived to harm patients even when such harm is unrelated
to our products or product candidates, our regulatory approvals could be revoked, suspended or otherwise negatively affected, and we
could be subject to costly and damaging product liability claims.
We
face the risk of incurring liabilities to clinical trial patients if they are injured as a result of their participation in our clinical
trials. In the event we commercialize Renevia in the EU or in other countries that recognize the CE Mark, we will also face product liability
risks associated with the use of Renevia by consumers. If any claims are made and if liability can be established, the amount of any
liability we or our affiliates may incur, could exceed any insurance coverage in effect, and the amount of the liability could be material
to our financial condition.
The
use or misuse of our product candidates in clinical trials and the sale of any products for which we obtain marketing approval, including
Renevia, exposes us to the risk of product liability claims. Product liability claims might be brought against us by consumers, healthcare
providers, pharmaceutical companies or others selling or otherwise coming into contact with our products. There is a risk that our product
candidates may induce adverse events. If we cannot successfully defend against product liability claims, we could incur substantial liability
and costs. In addition, regardless of merit or eventual outcome, product liability claims may result in:
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impairment
of our business reputation;
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initiation
of investigations by regulators;
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withdrawal
of clinical trial participants;
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costs
due to related litigation;
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distraction
of management’s attention from our primary business;
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substantial
monetary awards to patients or other claimants;
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the
inability to commercialize our product candidates;
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product
recalls, withdrawals or labeling, marketing or promotional restrictions; and
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decreased
demand for our product candidates, if approved for commercial sale.
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We
believe our current product liability insurance coverage is appropriate in light of our clinical programs; however, we may not be able
to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. If and when
we obtain marketing approval for product candidates, we intend to increase our insurance coverage to include the sale of commercial products;
however, we may be unable to obtain product liability insurance on commercially reasonable terms or in adequate amounts. Significant
damages have been awarded in class action lawsuits based on drugs or medical treatments that had unanticipated adverse effects. A successful
product liability claim or series of claims brought against us could cause our stock price to decline and, if the amount of damages exceeds
our insurance coverage, could adversely affect our results of operations and business.
Cell
Cure has received Israeli government grants for certain of its research and development activities. The terms of these grants may require
Cell Cure to seek approvals and to satisfy specified conditions to manufacture products and transfer or license grant-supported technologies
outside of Israel. In the context of such approvals, Cell Cure will be required to pay penalties in addition to the repayment of the
grants. Such grants are applied for on a yearly basis and may not be available or only partially granted in the future, which would increase
our costs.*
Cell
Cure has received Israeli government grants for certain of its research and development activities. The terms of these grants require
prior approval and the satisfaction of specified conditions to manufacture products and transfer or license technologies outside of Israel.
Under
the Encouragement of Research, Development and Technological Innovation in the Industry Law 5744-1984 (formerly known as the Law for
the Encouragement of Research and Development in Industry 5744-1984), and the regulations, guidelines, rules, procedures and benefit
tracks thereunder (collectively, the “Innovation Law”), annual research and development programs that meet specified criteria
and are approved by a committee of the Israel Innovation Authority (“IIA”) are eligible for grants. The grants awarded are
typically up to 50% of the project’s expenditures, as determined by the IIA committee and subject to the benefit track under which
the grant was awarded. A company that receives a grant from the IIA (a “Grant Recipient”), is typically required to pay royalties
to the IIA on income generated from products incorporating know-how developed using such grants (including income derived from services
associated with such products) or on all revenues of the Grant Recipient (depending upon the terms of the approval letters issued by
the IIA), until 100% of the U.S. dollar-linked grant plus annual LIBOR interest is repaid. In general, the rate of such royalties varies
between 3% to 5%.
The
obligation to pay royalties is contingent on actual revenues being generated from such products and services or actual revenues being
generated by the Grant Recipient in general (as the case may be). In the absence of such revenues, no payment of royalties is required.
It should be noted that the restrictions under the Innovation Law will continue to apply even after the repayment of such royalties in
full by the Grant Recipient including restrictions on the sale, transfer or licensing to a foreign entity of know-how developed as part
of the programs under which the grants were given.
The
terms of the grants under the Innovation Law also (generally) require that the products developed as part of the programs under which
the grants were given be manufactured in Israel and that the know-how developed thereunder may not be transferred outside of Israel,
unless prior written approval is received from the IIA (such approval is not required for the transfer of a portion of the manufacturing
capacity which does not exceed, in the aggregate, 10% of the portion declared to be manufactured outside of Israel in the applications
for funding (in which case only notification is required), and additional payments are required to be made to IIA). It should be noted
that this does not restrict the export of products that incorporate the funded know-how.
The
Innovation Law restricts the ability to transfer or license know-how funded by IIA outside of Israel. Transfer of IIA-funded know-how
outside of Israel requires prior approval and is subject to approval and payment of a redemption fee to the IIA calculated according
to the relevant formulas provided under the Innovation Law. A transfer or license for the purpose of the Innovation Law are generally
interpreted very broadly and include, inter alia, any actual sale or assignment of the IIA-funded know-how, any license to further develop
or otherwise exploit the IIA-funded know-how or the products resulting from such IIA-funded know-how or any other transaction, which,
in essence, constitutes a transfer of the IIA-funded know-how. Generally, a mere license solely to market or distribute products resulting
from the IIA-funded know-how would not be deemed a transfer or license for the purpose of the Innovation Law.
Part
of Cell Cure’s research and development efforts have been financed, partially, through grants that it has received from the IIA
and when we acquired our holdings in Cell Cure, we undertook in writing, vis-à-vis the IIA, to abide by, and to ensure the abidance
of Cell Cure to, the Innovation Law. We therefore must comply with the requirements of the Innovation Law and related regulations. As
of December 31, 2020, we received approximately $15.4 million of such grants.
The
restrictions under the Innovation Law may impair our ability to enter into agreements which involve IIA-funded products or know-how without
the approval of IIA. We cannot be certain that any approval of IIA will be obtained on terms that are acceptable to us, or at all. We
may not receive the required approvals should we wish to transfer or license IIA-funded know-how, manufacturing and/or development outside
of Israel in the future. Furthermore, in the event that we undertake a transaction involving the transfer to a non-Israeli entity of
know-how developed with IIA-funding pursuant to a merger or similar transaction, the consideration available to our shareholders may
be reduced by the amounts we are required to pay to the IIA. Any approval, if given, will generally be subject to additional financial
obligations. Failure to comply with the requirements under the Innovation Law may subject Cell Cure to mandatory repayment of grants
received by it (together with interest and penalties), as well as expose its directors and management to criminal proceedings. In addition,
the IIA may from time to time conduct royalty audits. Further grants may not be approved or reduced in the future, which would increase
our costs. IIA approval is not required for the marketing or distribution of products resulting from the IIA-funded research or development
in the ordinary course of business.
Our
international business exposes us to business, regulatory, political, operational, financial and economic risks associated with doing
business outside of the United States.
Cell
Cure is our 99% owned subsidiary located in Jerusalem, Israel. OpRegen is currently manufactured at Cell Cure and we anticipate transitioning
some or all of the manufacturing of OPC1 and VAC2 to Cell Cure as well. A portion of our OpRegen Phase 1/2a clinical trial has been conducted
at sites in Israel. Conducting operations internationally involves a number of risks, including:
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difficulty
in staffing and managing foreign operations;
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failure
by us to obtain the appropriate regulatory approvals;
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logistics
and regulations associated with shipping drug product or patient samples, including infrastructure conditions and transportation
delays;
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financial
risks, such as longer payment cycles and exposure to foreign currency exchange rate fluctuations;
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political
and economic instability, including wars, terrorism, and political unrest, outbreak of disease, boycotts, curtailment of trade and
other business restrictions;
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multiple,
conflicting and changing laws and regulations such as tax laws, export and import restrictions, employment laws, data and privacy
laws, regulatory requirements and other governmental approvals, permits and licenses; and
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regulatory
and compliance risks that may fall within the purview of the U.S. Foreign Corrupt Practices Act, UK Bribery Act, anti-boycott laws
and other anti-corruption laws.
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Any
of these factors could significantly harm our international operations and, consequently, our results of operations. In addition, any
failure to comply with applicable legal and regulatory obligations could impact us in a variety of ways that include, but are not limited
to, significant criminal, civil and administrative penalties, including imprisonment of individuals, fines and penalties, denial of export
privileges, seizure of shipments, and restrictions on certain business activities. Also, the failure to comply with applicable legal
and regulatory obligations could result in the disruption of our clinical trial activities.
Our
international operations could be affected by changes in laws, trade regulations, labor and employment regulations, and procedures and
actions affecting approval, production, pricing, reimbursement and marketing of tests, as well as by inter-governmental disputes. Any
of these changes could adversely affect our business.
Our
success internationally will depend, in part, on our ability to develop and implement policies and strategies that are effective in anticipating
and managing these and other risks in Israel. Failure to manage these and other risks may have a material adverse effect on our operations
in Israel and on our business as a whole.
Risks
Related to our Intellectual Property
Our
intellectual property may be insufficient to protect our products.
Our
patents and patent applications are directed to compositions of matter, formulations, methods of use and/or methods of manufacturing,
as appropriate. In addition to patenting our own technology and that of our subsidiaries, we have licensed patents and patent applications
for certain stem cell technology, hEPC, and hES cell lines, hydrogel technology and other technology from other companies.
The
patent positions of pharmaceutical and biotechnology companies, including ours, are generally uncertain and involve complex legal and
factual questions. Our business could be negatively affected by any of the following:
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the
claims of any patents that are issued may not provide meaningful protection, may not provide a basis for commercially viable products
or may not provide us with any competitive advantages;
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our
patents may be challenged by third parties;
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others
may have patents that relate to our technology or business that may prevent us from marketing our product candidates unless we are
able to obtain a license to those patents;
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the
pending patent applications to which we have rights may not result in issued patents;
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our
patents may have terms that are inadequate to protect our competitive position on our products;
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we
may not be successful in developing additional proprietary technologies that are patentable.
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In
addition, others may independently develop similar or alternative technologies, duplicate any of our technologies and, if patents are
licensed or issued to us, design around the patented technologies licensed to or developed by us. As an example, Astellas’ patent
portfolio with respect to the manufacture of its RPE products could adversely impact our rights to manufacture OpRegen. Moreover, we
could incur substantial costs in litigation if we have to defend ourselves in patent lawsuits brought by third parties or if we initiate
such lawsuits.
If
we are unable to obtain and enforce patents and to protect our trade secrets, others could use our technology to compete with us, which
could limit opportunities for us to generate revenues by licensing our technology and selling products.
Our
success will depend in part on our ability to obtain and enforce patents and maintain trade secrets in the United States and in other
countries. If we are unsuccessful at obtaining and enforcing patents, our competitors could use our technology and create products that
compete with our products, without paying license fees or royalties to us. The preparation, filing, and prosecution of patent applications
can be costly and time consuming. Our limited financial resources may not permit us to pursue patent protection of all of our technology
and products in all key markets. Even if we are able to obtain issued patents covering our technology or products, we may have to incur
substantial legal fees and other expenses to enforce our patent rights to protect our technology and products from infringing uses. We
may not have the financial resources to finance the litigation required to preserve our patent and trade secret rights. Litigation, interferences,
oppositions, inter partes reviews or other proceedings are, have been and may in the future be necessary in some instances to determine
the validity and scope of certain of our proprietary rights, and in other instances to determine the validity, scope or non-infringement
of certain patent rights claimed by third parties to be pertinent to the manufacture, use or sale of our products. This means that patents
owned or licensed by us may be lost if the outcome of a proceeding is unfavorable to us.
There
is no certainty that our pending or future patent applications will result in the issuance of patents.
Our
success depends in part on our ability to obtain and defend patent and other intellectual property rights that are important to the commercialization
of our products and product candidates. The degree of patent protection that will be afforded to our products and processes in the U.S.
and in other important markets remains uncertain and is dependent upon the scope of protection decided upon by the patent offices, courts,
administrative bodies and lawmakers in these countries. We can provide no assurance that we will successfully obtain or preserve patent
protection for the technologies incorporated into our products and processes, or that the protection obtained will be of sufficient breadth
and degree to protect our commercial interests in all countries where we conduct business. If we cannot prevent others from exploiting
our inventions, we will not derive the benefit from them that we currently expect. Furthermore, we can provide no assurance that our
products will not infringe patents or other intellectual property rights held by third parties.
In
Europe, there is uncertainty about the eligibility of hES cell subject matter for patent protection. The European Patent Convention prohibits
the granting of European patents for inventions that concern “uses of human embryos for industrial or commercial purposes.”
A recent decision at the Court of Justice of the European Union interpreted parthenogenetically produced hES cells as patentable subject
matter. Consequently, the European Patent Office now recognizes that human pluripotent stem cells (including human ES cells) can be created
without a destructive use of human embryos as of June 5, 2003, and patent applications relating to hES cell subject matter with a filing
and priority date after this date are no longer automatically excluded from patentability under Article 53 (a) EPC and Rule 28(c) EPC.
A
Patent Cooperation Treaty patent application related to OpRegen was filed on May 25, 2021, directed to the restoration of the anatomy
or functionality of a retina with OpRegen. As with all patent applications, there is no certainty that this or any of our other pending
or future patent applications will result in the issuance of patents.
Intellectual
property we may develop using grants received from governments are subject to rights maintained by those governments.
Research
and development we perform that is funded by grants from government, and any intellectual property that we create using those grants,
is subject to certain rights of the government entities to require that we license or grant rights to the intellectual property developed
using government funding in certain circumstances.
There
is no certainty that we will be able to obtain licenses to intellectual property rights owned by third parties.
There
are no assurances that any of our intellectual property rights will guarantee protection or market exclusivity for our products and product
candidates. In such cases, we may need to obtain enabling licenses from third parties to protect our products and product candidates,
try to secure market exclusivity or avoid infringing on the intellectual property rights of third parties. If we are unable to fully
protect our product candidates or achieve market exclusivity for our products and product candidates, our financial success will be dependent,
in part, on our ability to protect and enforce our intellectual property rights, to operate without infringing upon the proprietary rights
of others, or, when necessary, our ability to obtain enabling licenses.
If
we fail to meet our obligations under license agreements, we may lose our rights to key technologies on which our business depends.
Our
business depends on several critical technologies that are based in part on technology licensed from third parties. Those third-party
license agreements impose obligations on us, including payment obligations and obligations to pursue development of commercial products
under the licensed patents or technology. If a licensor believes that we have failed to meet our obligations under a license agreement,
the licensor could seek to limit or terminate our license rights, which could lead to costly and time-consuming litigation and, potentially,
a loss of the licensed rights. During the period of any such litigation, our ability to carry out the development and commercialization
of potential products, and our ability to raise any capital that we might then need, could be significantly and negatively affected.
If our license rights were restricted or ultimately lost, we would not be able to continue to use the licensed technology in our business.
Risks
Related to our Dependence on Third Parties
We
may become dependent on possible future collaborations to develop and commercialize many of our product candidates and to provide the
regulatory compliance, sales, marketing and distribution capabilities required for the success of our business.
We
may enter into various kinds of collaborative research and development and product marketing agreements to develop and commercialize
our products. The expected future milestone payments and cost reimbursements from collaboration agreements could provide an important
source of financing for our research and development programs, thereby facilitating the application of our technology to the development
and commercialization of our products, but there are risks associated with entering into collaboration arrangements.
There
is a risk we could become dependent upon one or more collaborative arrangements. A collaborative arrangement upon which we might depend
might be terminated by our collaboration partner or a partner might determine not to actively pursue the development or commercialization
of our products. A collaboration partner also may not be precluded from independently pursuing competing products and drug delivery approaches
or technologies.
There
is a risk that a collaboration partner might fail to perform its obligations under the collaborative arrangements or may be slow in performing
its obligations. In addition, a collaboration partner may experience financial difficulties at any time that could prevent it from having
available funds to contribute to the collaboration. If a collaboration partner fails to conduct its product development, commercialization,
regulatory compliance, sales and marketing or distribution activities successfully and in a timely manner, or if it terminates or materially
modifies its agreements with us, the development and commercialization of one or more product candidates could be delayed, curtailed
or terminated because we may not have sufficient financial resources or capabilities to continue such development and commercialization
on our own.
We
do not have the ability to independently conduct clinical trials required to obtain regulatory approvals for our product candidates.
We
will need to rely on third parties, such as CROs, data management companies, contract clinical research associates, medical institutions,
clinical investigators and contract laboratories to conduct any clinical trials we may undertake for our product candidates. We may also
rely on third parties to assist with preclinical development of our product candidates. If we outsource clinical trials, we may not directly
control the timing, conduct and expense of our clinical trials. If we enlist third parties to conduct clinical trials and they fail to
perform their contractual duties or regulatory obligations or fail to meet expected deadlines, if they need to be replaced or if the
quality or accuracy of the data they obtain is compromised due to failing to adhere to our clinical protocols or regulatory requirements
or for other reasons, our preclinical development activities or clinical trials may be extended, delayed, suspended or terminated, and
we may not obtain regulatory approval for or successfully commercialize our product candidates.
In
addition, quarantines, shelter-in-place and similar government orders, or the perception that such orders, shutdowns or other restrictions
on the conduct of business operations could occur, related to COVID-19 or other infectious diseases could impact personnel at these third
parties, which could disrupt our clinical timelines, which could have a material adverse impact on our business, prospects, financial
condition and results of operations.
We
have relied on CIRM to fund past clinical trials of OPC1 and we do not know if they will provide additional funding for future studies
of OPC1.
We
received $14.3 million of funding from CIRM to support clinical development of OPC1. We intend to apply for additional CIRM grants, if
available; however, we cannot provide any assurance that such grants will be awarded. If we are unable to obtain another CIRM grant,
we will need to raise funds through other mechanisms to support future clinical studies of OPC1, which may take additional time and effort.
If capital is not immediately available, this may force us to amend, delay, or discontinue the clinical trial and development work for
OPC1 until funding is secured.
We
may need to rely on marketing partners or contract sales companies.
If
we are able to develop our product candidates and obtain necessary regulatory approvals, we may need to rely on marketing, selling or
distributing partners. If we do not partner for commercial services, we will depend on our ability to build our own marketing, selling
and distribution capabilities, which would require the investment of significant financial and management resources, or we will need
to find collaborative marketing partners, sales representatives or wholesale distributors for the commercial sale of our products.
If
we market products through arrangements with third parties, we may pay sales commissions to sales representatives or we may sell or consign
products to distributors at wholesale prices. As a result, our gross profit from product sales may be lower than it would be if we sold
our products directly to end users at retail prices through our own sales force. There can be no assurance we will be able to negotiate
distribution or sales agreements with third parties on favorable terms to justify our investment in our products or achieve sufficient
revenues to support our operations.
Risks
Pertaining to Our Common Shares
Because
we are engaged in the development of pharmaceutical and stem cell therapy products, the price of our common shares may rise and fall
rapidly.*
The
market price of our common shares, like that of the shares of many biotechnology companies, has been highly volatile. The price of our
common shares may rise rapidly in response to certain events, such as the commencement of clinical trials of an experimental new therapy,
even though the outcome of those trials and the likelihood of ultimate FDA approval of a therapeutic product remain uncertain. Similarly,
prices of our common shares may fall rapidly in response to certain events such as unfavorable results of clinical trials or a delay
or failure to obtain FDA approval. For example, from January 1, 2021 through August 6, 2021 the closing price of our common shares has
ranged between $1.77 and $3.10 per shares. In addition, the failure of our earnings to meet analysts’ expectations could result
in a significant rapid decline in the market price of our common shares.
Because
we do not pay cash dividends, our common shares may not be a suitable investment for anyone who needs to earn dividend income.
We
do not pay cash dividends on our common shares. For the foreseeable future, we anticipate that any earnings generated in our business
will be used to finance the growth of our business and will not be paid out as dividends to holders of our common shares. This means
that our common shares may not be a suitable investment for anyone who needs to earn income from their investments.
Insiders
continue to have substantial influence over our company, which could limit your ability to influence the outcome of key transactions,
including a change of control.*
Our
directors, executive officers and their affiliates, in the aggregate, owned approximately 24.8% of our outstanding common shares as of
June 30, 2021. As a result, these shareholders, if acting together, will be able to heavily influence or control matters requiring approval
by our shareholders, including the election of directors and the approval of mergers, acquisitions or other extraordinary transactions.
They may also have interests that differ from yours and may vote in a way with which you disagree, and which may be averse to your interests.
This concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deter
certain public investors from purchasing our common shares and might ultimately affect the market price of our common shares.
If
we or our subsidiaries issue additional common shares or preferred shares, investors in our common shares may experience dilution of
their ownership interests.*
We
and our subsidiaries may issue additional common shares or other securities convertible into or exercisable for common shares to raise
additional capital or to hire or retain employees or consultants, or in connection with future acquisitions of companies or licenses
to technology or rights, or for other business purposes. The future issuance of additional securities may be dilutive to our shareholders
and may create downward pressure on the trading price of our common shares.
We
are currently authorized to issue an aggregate of 252,000,000 shares of capital stock consisting of 250,000,000 common shares and 2,000,000
“blank check” preferred shares, which means we may issue, without stockholder approval, one or more series of preferred stock
having such designation, powers, privileges, preferences, including preferences over our common shares respecting dividends and distributions,
terms of redemption and relative participation, optional, or other rights, if any, of the shares of each such series of preferred stock
and any qualifications, limitations or restrictions thereof, as our board of directors may determine. The terms of one or more series
of preferred stock could dilute the voting power or reduce the value of our common shares. Any preferred shares may also be convertible
into common shares on terms that would be dilutive to holders of common shares. Our subsidiaries may also issue their own preferred shares
with a similar impact on our ownership of the subsidiaries.
As
of June 30, 2021, Lineage had 167,036,511 common shares outstanding, 17,176,498 common shares reserved for issuance upon the exercise
of outstanding options under our employee stock option plans, 61,800 common shares reserved for issuance upon the vesting and settlement
of restricted stock units under our equity incentive plan.
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.
On March 5, 2021, Lineage filed a prospectus supplement with the SEC in connection with the offer and sale of an additional $25.0 million
of common shares under the Sales Agreement increasing the total offering to $50.0 million. As of March 31, 2021, Lineage issued 11,035,444
common shares at a weighted average price per share of $2.27 for gross proceeds of $25.0 million. For the three months ended June 30,
2021, Lineage issued an additional 2,824,332 common shares at a weighted average price per share of $2.87 for gross proceeds of $8.1
million. As of June 30, 2021, Lineage had issued 13,859,776 common shares at a weighted average price per share of $2.39 for gross proceeds
of $33.1 million under the Sales Agreement.
The
operation of some of our subsidiaries has been financed in part through the sale of shares of capital stock and warrants to purchase
securities of those subsidiaries to private investors. Future sales of such securities by our subsidiaries could reduce our ownership
interest in the applicable subsidiary, and correspondingly dilute our shareholder’s ownership interests in our consolidated enterprise.
Certain of our subsidiaries also have their own stock option plans and the exercise of stock options or the sale of restricted stock
under those plans would also reduce our ownership interest in the applicable subsidiary, with a resulting dilutive effect on the ownership
interest of our shareholders in our consolidated enterprise.
General
Risk Factors
Significant
disruptions of information technology systems or data security breaches, including the theft of our intellectual property, could adversely
affect our business.
We
are increasingly dependent on information technology systems and infrastructure to operate our business. In the ordinary course of our
business, we collect, store, process and transmit large amounts of confidential information, including intellectual property, proprietary
business information and personal information. It is critical that we do so in a secure manner to maintain the confidentiality, integrity
and availability of such information. We have also outsourced some of our operations (including parts of our information technology infrastructure)
to a number of third-party vendors who may have, or could gain, access to our confidential information. In addition, many of those third
parties, in turn, subcontract or outsource some of their responsibilities to third parties.
Our
information technology systems are large and complex and store large amounts of confidential information. The size and complexity of
these systems make them potentially vulnerable to service interruptions or to security breaches from inadvertent or intentional actions
by our employees, third party vendors and/or business partners, or from cyber-attacks by malicious third parties. Attacks of this nature
are increasing in frequency, persistence, sophistication and intensity, and are being conducted by sophisticated and organized groups
and individuals with a wide range of motives (including, but not limited to, industrial espionage) and expertise, including organized
criminal groups, “hacktivists,” nation states and others. In addition to the extraction of important information, such attacks
could include the deployment of harmful malware, ransomware, denial-of-service attacks, social engineering and other means to affect
service reliability and threaten the confidentiality, integrity and availability of our information. Although the aggregate impact on
our operations and financial condition has not been material to date, we have been the target of events of this nature and expect them
to continue.
Significant
disruptions of our, our third party vendors’ and/or business partners’ information technology systems or security breaches
could adversely affect our business operations and/or result in the loss, misappropriation, and/or unauthorized access, use or disclosure
of, or the prevention of access to, confidential information (including trade secrets or other intellectual property, proprietary business
information and personal information), and could result in financial, legal, business and reputational harm to us. Any such event that
leads to unauthorized access, use or disclosure of personal information, including personal information regarding our patients or employees,
could harm our reputation, compel us to comply with federal and/or state breach notification laws and foreign law equivalents, subject
us to mandatory corrective action, require us to verify the correctness of database contents and otherwise subject us to liability under
laws and regulations that protect the privacy and security of personal information, which could disrupt our business, result in increased
costs or loss of revenue, and/or result in significant legal and financial exposure. In addition, security breaches and other inappropriate
access can be difficult to detect, and any delay in identifying them may further harm us. Moreover, the prevalent use of mobile devices
to access confidential information increases the risk of security breaches. While we have implemented security measures to protect our
information technology systems and infrastructure, there can be no assurance that such measures will prevent service interruptions or
security breaches that could adversely affect our business. In addition, failure to maintain effective internal accounting controls related
to security breaches and cybersecurity in general could impact our ability to produce timely and accurate financial statements and subject
us to regulatory scrutiny.
Failure
of our internal control over financial reporting could harm our business and financial results.
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting. Because of its inherent
limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial
statements would be prevented or detected. Our growth and entry into new products, technologies and markets will place significant additional
pressure on our system of internal control over financial reporting. Any failure to maintain an effective system of internal control
over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud.
Operating our business through subsidiaries, some of which are located in foreign countries, also adds to the complexity of our internal
control over financial reporting and adds to the risk of a system failure, an undetected improper use or expenditure of funds or other
resources by a subsidiary, or a failure to properly report a transaction or financial results of a subsidiary. We allocate certain expenses
among Lineage itself and one or more of our subsidiaries, which creates a risk that the allocations we make may not accurately reflect
the benefit of an expenditure or use of financial or other resources by Lineage as the parent company and the subsidiaries among which
the allocations are made. An inaccurate allocation may impact our consolidated financial results, particularly in the case of subsidiaries
that we do not wholly own since our financial statements include adjustments to reflect the minority ownership interests in our subsidiaries
held by others.
If
we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of
Section 404 of the Sarbanes-Oxley Act in a timely manner or assert that our internal control over financial reporting is effective, or
if our independent registered public accounting firm is unable to express an opinion or expresses a qualified or adverse opinion about
the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of
our financial reports and the market price of our common shares could be negatively affected. In addition, we could become subject to
investigations by the NYSE American, the Securities and Exchange Commission, and other regulatory authorities, which could require additional
financial and management resources.
Current
economic and stock market conditions may adversely affect the price of our common shares.
The
stock market has been experiencing extreme price and volume fluctuations which have affected the market price of the equity securities
without regard to the operating performance of the issuing companies. Broad market fluctuations, as well as general economic, political
and other conditions (such as the recent coronavirus outbreak), may adversely affect the market price of our common shares.
Our
business could be negatively affected as a result of actions of activist shareholders, and such activism could affect the trading value
of our securities.
Shareholders
may, from time to time, engage in proxy solicitations or advance stockholder proposals, or otherwise attempt to effect changes and assert
influence on our board of directors and management. Activist campaigns that contest or conflict with our strategic direction or seek
changes in the composition of our board of directors could have an adverse effect on our operating results and financial condition. A
proxy contest would require us to incur significant legal and advisory fees, proxy solicitation expenses and administrative and associated
costs and require significant time and attention by our board of directors and management, diverting their attention from the pursuit
of our business strategy. Any perceived uncertainties as to our future direction and control, our ability to execute on our strategy,
or changes to the composition of our board of directors or senior management team arising from a proxy contest could lead to the perception
of a change in the direction of our business or instability which may result in the loss of potential business opportunities, make it
more difficult to pursue our strategic initiatives, or limit our ability to attract and retain qualified personnel and business partners,
any of which could adversely affect our business and operating results. If individuals are ultimately elected to our board of directors
with a specific agenda, it may adversely affect our ability to effectively implement our business strategy and create additional value
for our stockholders. We may choose to initiate, or may become subject to, litigation as a result of the proxy contest or matters arising
from the proxy contest, which would serve as a further distraction to our board of directors and management and would require us to incur
significant additional costs. In addition, actions such as those described above could cause significant fluctuations in our stock price
based upon temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and
prospects of our business.
Securities
analysts may not initiate coverage or continue to cover our common shares, and this may have a negative impact on the market price of
our common shares.
The
trading market for our common shares depends, in part, on the research and reports that securities analysts publish about our business
and our common shares. We do not have any control over these analysts. There is no guarantee that securities analysts will cover our
common shares. If securities analysts do not cover our common shares, the lack of research coverage may adversely affect the market price
of those shares. If securities analysts do cover our common shares, they could issue reports or recommendations that are unfavorable
to the price of our common shares, and they could downgrade a previously favorable report or recommendation, and in either case our share
prices could decline as a result of the report. If one or more of these analysts does not initiate coverage, ceases to cover our common
shares or fails to publish regular reports on our business, we could lose visibility in the financial markets, which could cause our
share prices or trading volume to decline.