Lineage Cell Therapeutics, Inc 10-K for FY2022
Lineage Cell Therapeutics, Inc. (LCTX)
About this 10-K
Lineage Cell Therapeutics, Inc filed this 10-K on March 9, 2023, covering the fiscal year ended December 31, 2022 (FY2022).
Headline figures
Fiscal year ended December 31, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $14.7M
- up 238.7% from $4.34M a year earlier
- Net loss
- $26.27M
- compared with a net loss of $43.02M a year earlier
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DOCUMENTS INCORPORATED BY REFERENCE
Lineage Cell Therapeutics, Inc.
Table of Contents
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PART I
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve substantial risks and uncertainties. The forward-looking statements are contained principally in Part I, Item 1. “Business,” Part I, Item 1A. “Risk Factors,” and Part II, Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” but are also contained elsewhere in this report. In some cases, you can identify forward-looking statements by the words “may,” “might,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “objective,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue” and “ongoing,” or the negative of these terms, or other comparable terminology intended to identify statements about the future. Forward-looking statements in this report include, but are not limited to, statements about:
| ● | the potential to receive developmental, regulatory, and commercialization milestone and royalty payments under our Collaboration and License Agreement with F. Hoffmann-La Roche Ltd and Genentech, Inc.; | |
| ● | our plans to research, develop and commercialize our product candidates; | |
| ● | the initiation, progress, success, cost and timing of our clinical trials and other product development activities; | |
| ● | the therapeutic potential of our product candidates, and the indications for which we intend to develop our product candidates; | |
| ● | our ability to successfully manufacture our product candidates for clinical development and, if approved, for commercialization, and the timing and costs of such manufacture; | |
| ● | the potential of our cell therapy platform; | |
| ● | our expectations and plans regarding existing and potential future collaborations with third parties such as pharmaceutical and biotechnology companies, government agencies, academic laboratories, and research institutes for the discovery, development, and/or commercialization of novel cell therapy products; | |
| ● | the size and growth of the potential markets for our product candidates and our ability to serve those markets; | |
| ● | the potential scope and value of our intellectual property rights; and | |
| ● | the effects on our operations of pandemics, including the COVID-19 pandemic, geopolitical conflicts, political and economic instability, and rising inflation and interest rates. |
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Forward-looking statements reflect our views and expectations as of the date of this report about future events and our future performance and condition, and involve known and unknown risks, uncertainties and other factors that may cause our actual activities, performance, results or condition to be materially different from those expressed or implied by the forward-looking statements. You should refer to “Item 1A. Risk Factors” in Part I of this report for a discussion of important factors that may cause our actual activities, performance, results and condition to differ materially from those expressed or implied by our forward-looking statements. As a result of a variety of factors, including those discussed in Part I, Item 1A of this report, our forward-looking statements may prove to be inaccurate, and the inaccuracy may be material. Accordingly, you should not place undue reliance on any forward-looking statement. We anticipate that subsequent events and developments may cause our current views and expectations to change. However, while we may elect to update the forward-looking statements in this report at some point in the future, we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date after the date of this report.
You should read this report and the documents that we reference in this report completely and with the understanding that our actual future performance, results and condition may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
This report also contains market data, industry forecasts and other data made by independent parties and by us relating to market size and growth and other data about our industry. This data involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. In addition, projections, assumptions and estimates of our future performance and the future performance of the markets in which we operate are necessarily subject to a high degree of uncertainty and risk.
All brand names or trademarks appearing in this report are the property of their respective owners. Solely for convenience, the trademarks and trade names in this report are referred to without the symbols ® and TM, but such references should not be construed as any indication that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto.
Unless otherwise stated or the context requires otherwise, references in this report to “Lineage,”, the “Company,” “our company,” “we,” “us,” and “our” refer collectively to Lineage Cell Therapeutics, Inc. and its consolidated subsidiaries.
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RISK FACTOR SUMMARY
Below is a summary of the material factors that make an investment in our common shares speculative or risky. This summary does not address all of the risks that we face. Additional discussion of the risks summarized in this risk factor summary, and other risks that we face, can be found below under the heading “Risk Factors” in Item 1A of Part I of this report and should be carefully considered, together with other information in this report and our other filings with the Securities and Exchange Commission (the “SEC”) before making investment decisions regarding our common shares.
| ● | We have incurred operating losses since inception, and we do not know if or when we will attain profitability. | |
| ● | Our investigational allogeneic cell therapies represent a novel approach to the treatment of serious medical conditions, which gives rise to significant challenges. We or our collaborators may not succeed in developing any of our product candidates. | |
| ● | 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 safe and effective for their target indications or commercially viable. | |
| ● | We will need to raise substantial additional capital to complete the development and seek regulatory approval of our product candidates and to commercialize products approved for marketing, if any, which may cause dilution to our existing shareholders. If we are unable to obtain adequate capital, we may delay, change or discontinue our product and technology development programs, which could significantly harm our business and prospects and cause the market price of our common shares to decline. | |
| ● | We are dependent on our third-party collaboration with Roche to develop and commercialize OpRegen. If Roche is not successful in developing and commercializing OpRegen and/or Roche terminates the collaboration, we will lose a significant source of potential revenue. | |
| ● | If we fail to meet our obligations under our in-license agreements, we may lose our rights to key technologies on which our business depends. | |
| ● | All of our manufacturing operations currently are conducted at our facility in Jerusalem, Israel, and any disruption to our operations at that facility could harm our business. | |
| ● | Cell Cure has received Israeli government grants for certain of its research and development activities. The terms of these grants may require us 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, we will be required to pay penalties in addition to the repayment of the grants. | |
| ● | We have relied on grant funding from CIRM to support clinical development of OPC1 and we may not be able to obtain additional CIRM funding. In addition, our profits from the sale of products resulting from CIRM-funded development, if any, will be reduced by amounts that we are required to pay CIRM. | |
| ● | The COVID-19 pandemic negatively affected, and it and any other similar public health crisis may in the future have a material adverse effect on, our 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. |
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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. | |
| ● | Some of our product candidates may be considered combination products by the FDA and other regulatory authorities, which could increase the complexity, cost and timeline for their development and regulatory approval. | |
| ● | Legislation and legislative and regulatory proposals intended to contain health care costs may adversely affect our business. | |
| ● | The FDA granted orphan drug designation to OPC1 for the treatment of acute spinal cord injuries, but there is no guarantee we will be able to maintain, or obtain the benefits associated with, such designation. | |
| ● | The results of preclinical studies and early clinical trials are not necessarily predictive of future results. | |
| ● | Interim, topline and preliminary data from clinical trials of our product candidates that we or our collaborators publicly disclose 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. | |
| ● | We have limited experience manufacturing our product candidates on a clinical scale and no experience manufacturing on a commercial scale. Any failure to manufacture our product candidates in sufficient quantities in accordance with our quality standards and regulatory requirements and at acceptable costs may result in significant clinical development delays, or impair the ability to obtain approval for or commercialize our product candidates. | |
| ● | The commercial success of any of our current or future product candidates will depend upon the degree of market acceptance by physicians, patients and third-party payors. | |
| ● | We face significant competition, and if our competitors develop and market products that are more effective, safer, more convenient, or less expensive than our product candidates, our commercial opportunities will be negatively impacted. | |
| ● | We face potential product liability claims, 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, our regulatory approvals could be revoked, suspended or otherwise negatively affected, and our reputation could suffer. | |
| ● | We currently have no marketing and sales force or distribution capabilities. | |
| ● | Our intellectual property may be insufficient to protect our products. | |
| ● | We do not have the ability to independently conduct clinical trials required to obtain regulatory approvals for our product candidates. | |
| ● | We rely on third-party suppliers, the loss of any of which, or their failure to perform as expected, could adversely affect our business. | |
| ● | 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. |
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| ITEM 1. | BUSINESS |
Overview
Lineage is a clinical-stage biotechnology company developing novel cell therapies to address unmet medical needs. Our programs are based on our proprietary cell-based technology platform and associated development and manufacturing capabilities. From this platform, we design, develop, manufacture, and test specialized human cells with anatomical and physiological functions similar to, or identical to, cells found naturally in the human body. Cells which we manufacture are created by specific developmental biological differentiation protocols that we apply to established, well-characterized, and self-renewing pluripotent cell lines. These cells are transplanted into patients and are designed to (a) replace or support cells that are absent or dysfunctional due to degenerative disease, aging, or traumatic injury, and (b) restore or augment functional activity in the affected person.
Our strategy is to efficiently leverage our technology platform and our development, formulation, delivery, and manufacturing capabilities to advance our programs internally, or in conjunction with strategic partners, to further enhance their value and probability of success. As one example, in December 2021 we entered into a Collaboration and License Agreement (the “Roche Agreement”) with F. Hoffmann-La Roche Ltd and Genentech, Inc., a member of the Roche Group (collectively or individually, “Roche” or “Genentech”), wherein we granted to Roche exclusive worldwide rights to develop and commercialize retinal pigment epithelium (“RPE”) cell therapies, including our proprietary cell therapy program known as OpRegen®, for the treatment of ocular disorders, including geographic atrophy (GA) secondary to age-related macular degeneration (AMD). Under the terms of the Roche Agreement, Lineage received a $50.0 million upfront payment and is eligible to receive up to $620.0 million in certain developmental, regulatory, and commercialization milestone payments. Lineage also is eligible to receive tiered double-digit percentage royalties on net sales of OpRegen in the U.S. and other major markets. See Note 14 (Commitments and Contingencies) to our consolidated financial statements included elsewhere in this Report for discussion on the Roche Agreement.
As of December 31, 2022, we have five allogeneic, or “off-the-shelf,” cell therapy programs in development, of which three have reached clinical testing:
Product Candidates
| ● | OpRegen®, an allogeneic retinal pigment epithelium cell replacement therapy currently in a Phase 2a multicenter clinical trial, being conducted by Genentech, for the treatment of geographic atrophy (GA) secondary to age-related macular degeneration (AMD), also known as atrophic or dry AMD. A previous Phase 1/2a trial conducted by Lineage enrolled twenty-four (24) individuals with dry AMD with GA. In December 2021, this program was partnered with Roche for further clinical development and commercialization. | |
| ● | OPC1, an allogeneic oligodendrocyte progenitor cell therapy currently in long-term follow-up from a Phase 1/2a multicenter clinical trial for cervical spinal cord injuries (“SCI”). To date, five (5) patients with thoracic spinal cord injuries and twenty-five (25) patients with cervical spinal cord injuries have been enrolled in clinical trials of OPC1. The clinical development of OPC1 has been partially funded by $14.3 million received under a grant from the California Institute for Regenerative Medicine (“CIRM”). Additional clinical trials are being planned. | |
| ● | VAC, an allogeneic cancer immunotherapy comprised of antigen-presenting dendritic cells. One of the VAC product candidates, VAC2, is currently in a Phase 1 clinical trial in non-small cell lung cancer (“NSCLC”). This clinical trial is being funded and conducted by Cancer Research UK, one of the world’s largest independent cancer research charities. An additional VAC-based product candidate is in preclinical development with our partner, Immunomic Therapeutics, Inc. (“ITI”), for the treatment of glioblastoma multiforme (“GBM”).
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| ● | ANP1, an allogeneic auditory neuron progenitor cell transplant currently in preclinical development for the treatment of debilitating hearing loss (“DHL”). | |
| ● | PNC1, an allogeneic photoreceptor cell transplant currently in preclinical development for the treatment of vision loss due to photoreceptor dysfunction or damage. |
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Other Programs
We have additional undisclosed product candidates being considered for development, which cover a range of therapeutic areas and unmet medical needs. Generally, these product candidates are based on the same platform technology and employ a similar guided cell differentiation and transplant approach as the product candidates detailed above, but in some cases may also include genetic modifications designed to enhance efficacy and/or safety profiles.
In addition to seeking to create value for shareholders by developing product candidates and advancing those candidates through clinical development, we also may seek to create value from our large patent estate and additional related technologies and capabilities, through partnering and/or strategic transactions.
2022 Development Highlights
We achieved numerous strategic and operational accomplishments during 2022, including advancing our clinical programs and product development in several key programs.
| ● | Continued execution under our collaboration with Roche and Genentech for the development of RG6501 (OpRegen) across multiple functional areas. | |
| ● | The expansion of our clinical pipeline to include a new auditory neuronal cell transplant program (ANP1) for the treatment of hearing loss. | |
| ● | The expansion of our clinical pipeline to include a new cell therapy development program, photoreceptor neural cell (PNC1) transplants for the treatment of vision loss due to photoreceptor dysfunction. | |
| ● | Data were presented at the Association for Research in Vision and Ophthalmology annual meeting (ARVO), suggesting that OpRegen continues to be well tolerated with an acceptable safety profile, coupled with visual function and outer retinal structure improvements in patients with GA and impaired vision. | |
| ● | Reported that our partner, Cancer Research UK, had completed patient enrollment in a Phase 1 clinical study of VAC2 for the treatment of non-small cell lung cancer. |
Business Strategy
Our goal is to address unmet medical needs by developing and advancing allogeneic, or “off-the-shelf,” treatments comprised of functional cells delivered to the body. Our biological therapies are derived from the differentiation of pluripotent stem cells from established and self-renewing cell lines. We direct these pluripotent cells to become specific cell types, or combinations of cell types, and use those differentiated cells as treatments to restore diseased or diminished functions, such as impaired vision, loss of movement, sensation, and hearing, or to increase immune response to tumors or infectious agents.
To support the furtherance of our product candidates, we aim to generate or have generated in vitro and in vivo data to support human testing where such testing is warranted. In some cases, we may collaborate with strategic partners, external advisors, or consultants to support the development of our cell therapy technology.
One area of focus is our continued effort to support our partner, Genentech, with the production and testing of our lead product candidate, OpRegen (RG6501), which currently is being evaluated in a 30-60 patient Phase 2a multicenter, open-label, single arm clinical study, as well as in the follow-up portion of a 24-patient Phase 1/2a multicenter, open-label, clinical study, in patients with dry age-related macular degeneration (dry AMD).
We also aim to advance our clinical-stage product candidate, OPC1, for the treatment of spinal cord injury, into a clinical study to evaluate the safety and performance of a novel cell delivery system to deliver oligodendrocyte progenitor cells to the spinal parenchyma.
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Our clinical stage dendritic cell product candidate, VAC2, is the subject of a Phase 1 clinical trial conducted by our partner, Cancer Research UK, which has completed enrollment of eight (8) patients with advanced non-small cell lung cancer and we anticipate receiving additional data from that trial during this year.
Our preclinical product candidates, ANP1 for hearing loss and our photoreceptor program, PNC1, to address various forms of blindness, will continue to be evaluated in preclinical testing to determine the suitability of each program to advance into initial human testing.
We have identified, and we may seek to develop, additional product candidates based on our cell replacement approach. We may elect to conduct these activities on our own or through various collaborative arrangements. Such additional product candidates could include gene edits, which may provide enhanced functionality or offer more attractive safety or commercial profiles. We may utilize various types of pluripotent cell lines as starting material for our product candidates. Presently, our process development and manufacturing activities, including our cGMP production of clinical trial material, are predominantly conducted at our facility located in Jerusalem Israel, but such work may be supplemented or complemented by our additional facility located in Carlsbad, California.
Cell Therapy Technology Platform
We believe we are a leader in pluripotent, cell-based asset development based on directed differentiation protocols of cellular lineages and cell manufacturing capabilities. Pluripotent cells, which are widely published as capable of becoming any human cell type, have potential applications in many areas of medicine with large unmet patient needs, including certain age-related degenerative diseases, degenerative conditions, or traumatic injury. We are currently in clinical development for various pluripotent cell-derived product candidates such as RPE cells, oligodendrocyte progenitor cells, and dendritic cells and preclinical development for auditory neurons and photoreceptor cells. In addition, we are considering the differentiation of pluripotent cells into additional cell types that may have therapeutic benefits in other areas of unmet medical need.
Cellular therapies are often aimed at regenerating or replacing affected cells or tissues and therefore may have more durable, broader, or more suitable applicability than certain traditional pharmaceutical products which seek to influence a single molecular target or group of biological pathways. Small molecules and biologic therapies that require systemic delivery into the body often have unexpected side effects that can limit their usefulness. When cell replacement is locally administered to a specific anatomical compartment, systemic side effects are usually well-tolerated. Lineage’s cell therapy approach resembles transplant medicine, as it is focused on whether transplanted cells are retained or rejected by the body and whether the transplanted cells function as expected.
A key advantage of our approach is that it can provide us the opportunity to rapidly develop new programs without the extensive and costly steps traditionally required to develop a small molecule agonist or antagonist. Whereas small molecule product development typically requires selection and validation of a drug target, followed by screening millions of molecules (e.g., a “library” of compounds) to identify hits, followed by chemical modification guided by structure-activity relationship or “SAR” to develop a hit into a more potent lead, the process of developing a new cell therapy from pluripotent lines can be comparatively faster because the target cell type is already known to be “validated”, insofar as it is well-established in the literature as being the cell type which is dysfunctional or deficient in the patient. The most challenging step in developing a new cell therapy is the establishment of a controllable and reproducible differentiation protocol which can create the quality of cells to support clinical testing and commercial supply, a process which avoids mass screening campaigns and is more readily accomplished via the combination of literature reviews and in-house experience with pluripotent cell differentiation. This approach can facilitate pipeline expansion at a lower cost than traditional methods (Figure 1).
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Figure 1. Lineage’s Internal cGMP Facility Capabilities
In addition to our corporate headquarters located in Carlsbad, California, we recently opened a new research and development (R&D) facility also located in Carlsbad, expanding the Company’s R&D capabilities in the U.S. and supporting the development of current and future allogeneic cell transplant programs. We also have a modern and innovative manufacturing facility in the Bio Park on the campus of the Hadassah University Hospital in Jerusalem, Israel. The facility includes process development laboratories and a state-of-the-art, current good manufacturing practice (“cGMP”) cell manufacturing facility. It is designed and equipped to run simultaneous cGMP processes and to produce a range of cell therapy products for human use in clinical trials as well as improve scalability for potential commercialization. Currently, all of our cGMP manufacturing processes, including cell banking and product manufacturing for our cell therapy product candidates, are conducted in this facility (Figure 2).
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Figure 2. Novel Clinical Cell Therapy Pipeline
OpRegen®
OpRegen is a retinal pigment epithelial cell therapy in Phase 2a development for the treatment of geographic atrophy secondary to age-related macular degeneration. Following subretinal delivery, OpRegen has the potential to counteract RPE cell loss in areas of GA lesions by supporting retinal structure and function. OpRegen is being developed under a worldwide collaboration between Lineage, Roche and Genentech, a member of the Roche Group. See Note 14 (Commitments and Contingencies) to our consolidated financial statements included elsewhere in this Report for discussion on the Roche Agreement.
OpRegen has been granted Fast Track Designation from the U.S. FDA, which includes an expedited regulatory path with the ability for increased interfacing with the FDA during the clinical development process.
AMD is a gradual, progressive, deterioration of the macula, the small sensitive area in the center of the retina that provides clear, high-definition central vision. It is a leading cause of vision loss in people over the age of 65 in the developed world. According to a 2022 report in JAMA Ophthalmology, 18.34 million individuals in the U.S. 40 years and older (11.64%) were living with early-stage AMD and 1.49 million (0.94%) were living with late-stage AMD in 2019. As the area of atrophy begins to include the fovea (the center of the macula), patients may lose their central vision, making facial recognition, reading, and driving difficult or impossible, and may ultimately become legally blind. The exact cause of GA secondary to AMD is unknown, but is thought to result from multiple factors, such as genetics, age, smoking history, and environmental effects. There are two clinical presentations of AMD, the dry form, and the wet, or neovascular form (growth of abnormal new blood vessels). Dry AMD typically advances slowly toward GA as RPE cells and photoreceptors become dysfunctional and deteriorate over time. RPE cells support and nourish the retina by metabolizing waste by-products and producing a number of components essential for photoreceptor health and function. If the metabolic waste products accumulate, lesions known as drusen may result. Approximately 85-90% of AMD patients suffer from the dry form of AMD, for which there is only one FDA approved therapeutic option at this time. Additionally, dry AMD may also lead to wet AMD, a condition for which there are several FDA-approved treatments administered locally to inhibit the growth of new blood vessels. Physicians often recommend a healthy diet, exercise and/or nutritional supplements for dry AMD, but nutritional supplements have shown limited efficacy in delaying the onset of more progressive disease in longer-term studies. The schematics in Figures 3 and 4 show a representation of the process of drusen formation and the goal of cell replacement therapy.
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Figure 3. Dry AMD involves the loss of retina cells, creating an area of geographic atrophy (GA), which causes impaired vision and blindness |
Figure 4. OpRegen is an injection of RPE cells delivered to the retina, to replace lost retinal cells and preserve or restore vision |
We believe one of the most promising approaches to treat GA secondary to dry AMD is to replace the layer of damaged RPE cells with new, healthy, and functional RPE cells manufactured from a well-characterized, allogeneic cell line, transplanted to the subretinal space around the atrophic area (GA). OpRegen is a cell replacement therapy derived from our pluripotent cell technology in which our proprietary directed-differentiation methods convert pluripotent stem cells into nearly pure populations of RPE cells. Using this method, OpRegen is grown free of any animal products and consists of human RPE cells with high yield and purity that can be transplanted directly into the patient’s eye, where the patient’s own RPE cells are missing or dysfunctional. The OpRegen therapeutic approach is designed to replace damaged or lost RPE cells with the goal of slowing disease progression to preserve and/or restore visual function.
OpRegen is intended to be an allogeneic, or “off-the-shelf,” product provided to retinal surgeons in an “easy-to-use” form for transplantation. We believe OpRegen could have a lasting benefit from a single administration, or may be administered every several years. This approach differs from other investigational agents, as well as for the single approved drug for treatment of GA secondary to AMD, pegcetacoplan injection (SYFOVRE®), and approved agents currently marketed for wet AMD, such as ranibizumab (Lucentis®) and aflibercept (Eylea®). All of these approaches require repeated, frequent (monthly or every-other-month) intravitreal injections into the eye.
In a Phase 1/2a clinical trial, OpRegen has demonstrated the potential to slow, stop or reverse disease progression in geographic atrophy secondary to AMD. This is an open-label, single-arm, multi-center, dose-escalation trial evaluating a single administration of OpRegen delivered subretinally in patients with bilateral GA. Patient enrollment completed in November 2020, with twenty-four patients recruited into four cohorts. The first three cohorts enrolled only legally blind patients with a best corrected visual acuity (BCVA) of 20/200 or worse. The fourth cohort enrolled 12 patients with impaired vision (BCVA from 20/65 to 20/250 with smaller mean areas of GA). Cohort 4 also included patients treated with a new “thaw-and-inject” formulation of OpRegen, which could be shipped directly to sites and used immediately upon thawing. The primary objective of the study was to evaluate the safety and tolerability of OpRegen as assessed by the incidence and frequency of treatment-emergent adverse events. Secondary objectives evaluated the preliminary activity of OpRegen treatment by assessing the changes in ophthalmological parameters measured by various methods of primary clinical relevance. Long-term follow-up of patients in this study is currently ongoing.
Results from the primary endpoint, the safety and tolerability at one year post-OpRegen transplant, were presented at the 2022 Association for Research in Vision and Ophthalmology Annual Meeting (ARVO 2022), and suggest that OpRegen RPE cells are generally well-tolerated with an acceptable safety profile. Importantly, no unexpected ocular adverse events (AEs) were observed and those events that were observed were considered expected based on the surgical procedures involved in OpRegen administration, such as vitrectomy. Most AEs reported (cohorts 1-3, 87%; cohort 4, 93%) were mild in severity.
Findings on clinical examination by different imaging modalities have shown positive clinical benefits in some patients as evidenced by retinal structure improvement and decreases in drusen, as well as durable engraftment of OpRegen cells now extending to more than five years in the earliest treated patients. Across the study, a trend toward slower GA progression in treated compared to untreated eyes continues to be present. Of note, five subjects from cohort 4 where the OpRegen suspension was delivered to most or all of the GA area, including the fovea, have shown evidence of outer retinal structural improvement (tissue restoration). This was accompanied by a reduction in the overall size, or no growth in the area of atrophy, at least 12 months post-treatment and the presence of key retinal cells that were not observable at baseline study entry. This anatomical effect was accompanied by improvements in visual acuity in most cohort 4 treated patients (average gain of 7.6 letters read), but particularly the five patients with better surgical coverage (average 12.8 letter gain). Furthermore, differences in visual acuity between treated and untreated eyes remained statistically significant across Cohort 4 patients at 15 months post-treatment. These unprecedented findings support the view that dry AMD is not an irreversible, degenerative condition and that some portion of diseased retinal tissue may be recoverable in atrophic end-stage disease patients.
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In December 2021, we entered into the Roche Agreement for the development and commercialization of OpRegen. See “—Collaborations—Roche Collaboration Agreement,” below.
In November 2022, we announced our partner Genentech, a member of the Roche group has launched a Phase 2a, multicenter, open-label, single arm clinical study of RG6501 (OpRegen), a retinal pigment epithelial cell therapy. The study is intended to optimize subretinal surgical delivery and evaluate the safety and activity of OpRegen in approximately 30, and up to 60, patients with geographic atrophy (GA) secondary to age-related macular degeneration. The primary objectives of the study are to evaluate (i) the proportion of patients with subretinal surgical delivery of OpRegen to target regions under the retina, and (ii) to evaluate the safety of subretinal surgical delivery of OpRegen as measured by the incidence and severity of procedure-related adverse events at 3 months following surgery. A key secondary objective is to evaluate the proportion of patients with qualitative improvement in retinal structure, as determined by Optical Coherence Tomography (SD-OCT) imaging, within 3 months following surgery. RG6501 (OpRegen) is currently being developed under an exclusive worldwide collaboration between Lineage, Roche and Genentech.
OPC1
OPC1 is an oligodendrocyte progenitor cell therapy in Phase 1/2a development for the treatment of acute SCI. SCI occurs when the spinal cord is subjected to a severe crush or contusion injury, such as that caused by a car or motorcycle accident, and typically results in severe functional impairment, including limb paralysis, aberrant pain signaling, and/or loss of bladder and sexual function. There are approximately 18,000 new spinal cord injuries annually in the U.S. (NSCIC SCI Facts and Figures at a Glance (2019)), and there are currently no FDA-approved drugs specifically for the treatment of SCI, although methylprednisolone, a corticosteroid generally used as an anti-inflammatory drug, is sometimes prescribed on an off-label basis to reduce acute inflammation in the injured spinal cord immediately after injury. Approaches to treat this complex injury may include multiple mechanisms of action, such as biologics that preserve surviving neurons and stimulate new nerve axon outgrowth, suppression of lesion cavity formation at the injury site, generation of new blood vessels to repair the ischemic damage from injury, and myelination of the demyelinated and newly formed nerve axons. A promising therapeutic target in SCI is replacement of oligodendrocytes that are selectively lost at the injury site. As the sole source of the insulating protein myelin in the brain and spinal cord, oligodendrocytes wrap around nerve axons and allow the conduction of electrical impulses throughout the central nervous system (“CNS”), as shown in Figure 5.
Figure 5. Oligodendrocytes are the myelinating cells of the CNS and are critical for nerve signal conduction
OPC1 is derived from our pluripotent cell technology under cGMP conditions using a directed differentiation method. These cells are stored frozen until ready for use and prepared for direct administration into the injured spinal cord. Based on preclinical studies, when OPC1 is transplanted into the injured spinal cord, the cells undergo further maturation to generate a replacement population of oligodendrocytes at the injury site that are capable of remyelinating denuded and newly formed nerve axons. Based on preclinical studies, prior to their maturation, the transplanted oligodendrocyte progenitor cells are believed to stimulate additional reparative processes, including promotion of neuron survival and nerve axon outgrowth, and induction of blood vessel formation in and around the injury site. In addition, OPC1 cells rapidly migrate from the injection point to the injury site where they generate a supportive tissue matrix and suppress cavitation. Cavitation is a destructive process that occurs within the spinal cord following SCI, and typically results in permanent loss of motor and sensory function. A patient with cavitation can develop a condition known as syringomyelia, which results in additional neurological and functional damage to the patient and can result in chronic pain (Figure 6). Based on the multiple reparative properties associated with OPC1, we believe this candidate cell therapy product is ideally suited to treat neurological conditions such as SCI and other demyelination disorders of the CNS.
Figure 6. Suppression of spinal cavitation in a rat contusion model
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The development of OPC1 has been supported by a $14.3 million clinical development grant from CIRM. We intend to apply for additional grants from CIRM for the program’s continued development. See “—Grants from Government Entities,” below.
Before our acquisition of Asterias Biotherapeutics, Inc. (“Asterias”), Asterias was testing OPC1 in two clinical trials: a five-patient Phase 1 safety trial in acute thoracic SCI and a 25-patient Phase 1/2a dose escalation trial in subacute cervical SCI, called the SCiStar trial. The SCiStar trial was an open-label, single-arm trial that tested three sequential escalating doses of OPC1 administered at up to 20 million OPC1 cells with subacute, C-4 to C-7, motor complete (AIS-A or AIS-B) cervical SCI. OPC1 was administered 21 to 42 days post-injury. Patients were followed by neurological exams and imaging procedures to assess the safety and activity of the product. Key findings for both the thoracic and cervical studies are shown in Figure 7.
Figure 7. OPC1 Thoracic & Cervical Clinical Trials Overview
The FDA designated OPC1 as a Regenerative Medicine Advanced Therapy (“RMAT”), for the treatment of subacute SCI. RMAT is an accelerated development pathway and includes the ability for increased interfacing with the FDA during clinical development. The FDA has also granted OPC1 Orphan Drug Designation, providing a pathway to possible market exclusivity.
In 2019, we transferred all cGMP manufacturing processes, including the establishment of cell banks and the OPC1 process development and manufacturing for clinical studies, to our cell therapy manufacturing facility in Jerusalem, Israel. Improvements to the manufacturing process were performed to create enhancements to the production process and scale and to achieve greater purity of OPC1. We also developed a thaw and inject formulation of OPC1 to facilitate logistics and handling at the point of care with the elimination of the dose preparation at the clinical site. Throughout 2021, we manufactured clinical batches based on the improved process in a thaw and inject formulation in preparation for a larger-scale, late-stage clinical trial.
In February 2021, we announced an exclusive agreement with Neurgain Technologies, Inc. (“Neurgain”), to evaluate a novel delivery system for OPC1. Preliminary assessment of prototypes revealed promising compatibility with OPC1 product while simplifying the surgical procedure by providing surgeons with an instrument that is small, simple to use, and would not require stopping the patient’s ventilator to perform the injection, allowing for flexibility with accurate delivery to the injury site. We continued to evaluate the Neurgain device throughout 2021 and 2022. We have submitted an RMAT package to the FDA to support the use of a new delivery device, along with a protocol synopsis for a small safety study in both subacute and chronic patients. We intend to submit an IND amendment during 2023 for a human safety clinical study to validate the device (DOSED – Delivery of Oligodendrocyte Progenitor Cells for Spinal Cord Injury: Evaluation of a Novel Device) and an additional submission to support the use of the device in a late-stage clinical study to follow.
We are actively working both on expanding our existing and establishing new collaborative partnerships with SCI patient engagement and advocacy organizations, with the overarching goals of enhancing awareness of SCI and elevating the patient’s voice in the treatment development process.
VAC Platform
VAC is our immuno-oncology platform using dendritic cells loaded with antigens for the treatment of cancer. Cancer afflicts millions worldwide and represents one of the largest unmet clinical needs with current treatment options providing limited efficacy and a wide range of potentially debilitating side effects. As the most potent type of antigen-presenting cell in the body, dendritic cells instruct the human body’s immune system to attack and eliminate harmful pathogens and unwanted cells, including cancer cells.
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To provide a more targeted treatment for non-small cell lung cancer (NSCLC), we are currently developing VAC2 as an allogeneic, or non-patient specific, cancer vaccine designed to stimulate patient immune responses to an antigen, human telomerase reverse transcriptase (hTERT), which is commonly expressed in cancerous cells but is not usually found in normal adult cells. VAC2 is produced by our pluripotent cell technology using a directed differentiation method and is comprised of a population of mature dendritic cells to which the hTERT antigen was introduced via an mRNA construct which is loaded into the dendritic cell via electroporation. The VAC1 autologous program, which preceded VAC2 but relied on the same antigen, served as proof of concept behind our approach to utilize dendritic cell vaccines targeting telomerase to treat cancer.
Using pluripotent cells as the starting material for VAC production offers certain advantages. Compared to technologies that rely on the use of a patient’s own blood, our pluripotent cell technology provides a path to a more scalable system for the production of a large number of vaccine doses, lower manufacturing costs, greater product consistency, and off-the-shelf availability. In addition, we believe that as an allogeneic therapy, VAC has the potential to stimulate a more robust immune response through an adjuvant effect resulting from the partial immune mismatch between the VAC cells and patients receiving the therapy. We believe that VAC can be used as a platform technology that can be modified to carry a diverse number or type of antigen, including patient-specific tumor neo-antigens.
In September 2014, Asterias initiated clinical development of VAC2 by entering into a Clinical Trial and Option Agreement (the “CRUK Agreement”) with Cancer Research UK (“CRUK”) and Cancer Research Technology Limited (“CRT”), a wholly owned subsidiary of CRUK, under which CRUK agreed to fund Phase 1 clinical development of VAC2 in NSCLC. CRUK was responsible, at its own cost, for manufacturing clinical grade VAC2 and for carrying out the Phase 1 clinical trial of VAC2. In April 2022, we announced that CRUK had completed patient enrollment in the ongoing Phase 1 clinical trial of VAC2 for the treatment of NSCLC. All eight patients completed dosing in the initial aspect of the trial and CRUK is currently conducting analyses of various samples collected per protocol.
As previously reported, VAC2 demonstrated potent and specific induction of immune response in all patients dosed and analyzed to date, with high levels of peripheral antigen-specific immunogenicity observed at multiple time points. Importantly, VAC2 appeared to be well tolerated with no unexpected adverse events (AEs) and no dose-limiting toxicity, serious adverse events (SAEs) or AEs.
We completed the transfer of all cGMP manufacturing processes, including the establishment of cell banks and the VAC2 process development and manufacturing for clinical studies, to our cell therapy manufacturing facility in Jerusalem, Israel.
In April 2021, Lineage entered into a worldwide license and development collaboration agreement with ITI. See “—Collaborations—ITI Collaboration Agreement,” below.
Throughout 2022, we focused on improving the manufacturing process for VAC to provide a reliable supply for potential future clinical studies and commercial development. We submitted a pre-IND package to the FDA in the third quarter of 2022 and have received important feedback that will help guide any future full IND submission(s). We also continue to evaluate additional opportunities for the introduction of new VAC candidates based on internally identified or partnered tumor antigens to expand the VAC platform.
Auditory Neurons
The Auditory Neurons program was established in 2022 with the goal of advancing auditory neuron transplant therapy as a treatment option for hearing loss conditions. The initial focus of this program is on the treatment of auditory neuropathy spectrum disorders (ANSD), a group of conditions characterized by the loss of auditory neuron function where the sound is not transmitted properly from the cochlea (inner ear) to the brain. Based on our proprietary technology platform, we have developed a unique differentiation process for generating auditory neurons (ANP1), which are planned to undergo preclinical testing this year to assess their safety and delivery system. In February 2023, we reported that preclinical testing of ANP1 had begun through a collaboration with the University of Michigan and Yehoash Raphael, Ph.D., The R. Jamison and Betty Williams Professor of Otolaryngology, Department of Otolaryngology-Head and Neck Surgery and Lab Director at the University of Michigan Kresge Hearing Research Institute.
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Photoreceptors
The Photoreceptor program is developing the process of directing the differentiation of human pluripotent cells into clinical-grade transplantable photoreceptor precursors/cells (PRCs) and to show their further differentiation, integration, and function after transplantation into the subretinal space of animal models of photoreceptor degeneration. Photoreceptor degeneration is the hallmark of a variety of retinal diseases such as retinitis pigmentosa (RP). Currently, the only approved treatments are gene therapies which treat specific genetic defects that lead to RP. Our PNC1 program is aimed to replace damaged photoreceptors regardless of the origin of degeneration. We hope to be able to present top-line preclinical data once the appropriate intellectual property submissions have been made and as data become available.
Collaborations
To accelerate the discovery and advancement of transplanting specific cell types into the body, we have entered into, and intend to seek additional opportunities to form collaborations with a diverse group of strategic partners. We have entered collaborations with pharmaceutical and biotechnology companies, government agencies, academic laboratories, and research institutes with resources and expertise in diverse areas in an effort to advance our discovery and development platforms and will continue to evaluate such collaborations.
One key principle of our approach to collaborations is to share rewards and risks of conducting large-scale clinical trials and commercializing a product, but also to provide the broadest patient population with the earliest access to our therapies.
Roche Collaboration Agreement
On December 17, 2021, Lineage entered into the Roche Agreement, pursuant to which Lineage granted to Roche exclusive worldwide rights to develop and commercialize retinal pigment epithelium cell therapies, including its proprietary cell therapy known as OpRegen, for the treatment of ocular disorders, including advanced dry AMD with GA.
Under the terms of the Roche Agreement, Roche will assume responsibility for further clinical development and commercialization of OpRegen, Lineage will be responsible for completing activities related to the ongoing clinical study Phase 1/2a open-label, dose-escalation clinical safety and efficacy study in patients with advanced dry AMD with GA, for which enrollment is complete, and performing certain manufacturing and process development activities.
Roche paid Lineage a $50.0 million upfront payment (which was received in January 2022) and Lineage is eligible to receive up to an additional $620.0 million in certain developmental, regulatory and commercialization milestone payments. Lineage is also eligible for tiered double-digit percentage royalties on net sales of OpRegen. All milestone payments, and royalty payments, due under the Roche Agreement are subject to the existence of certain intellectual property rights that cover OpRegen at the time such payments would otherwise become due, and the royalties on net sales of OpRegen are subject to financial offsets based on the existence of competing products.
Unless earlier terminated by either party, the Roche Agreement will expire on a product-by-product and country-by-country basis upon the expiration of all of Roche’s payment obligations under the Roche Agreement. Roche may terminate the Roche Agreement in its entirety, or on a product-by-product or country-by-country basis, at any time with advanced written notice. Either party may terminate the Roche Agreement in its entirety with written notice for the other party’s material breach if such party fails to cure the breach. Either party also may terminate the Roche Agreement in its entirety upon certain insolvency events involving the other party.
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Lineage is obligated to pay to the IIA (as defined below) approximately 24.3% of the upfront payment and of any future payments Lineage receives under the Roche Agreement, up to an aggregate cap on all payments to IIA, such cap growing over time via interest accrual until paid in full, which currently stands at approximately $91.2 million. In addition, pursuant to the Second Amended and Restated License Agreement, dated June 15, 2017, between our foreign subsidiary located in Jerusalem, Israel, Cell Cure Neurosciences Ltd. (“Cell Cure”), and Hadasit Medical Research and Development Ltd. (“Hadasit”), as amended, and a letter agreement entered into between Cell Cure and Hadasit on December 17, 2021, Cell Cure is obligated to pay to Hadasit (i) a maximum of 21.5% of the upfront payment (subject to certain reductions) and of any milestone payments Lineage receives from Roche under the Roche Agreement, and (ii) up to 50% of all royalty payments (subject to a maximum payment of 5% of net sales of products) Lineage receives from Roche under the Roche Agreement. In accordance with the foregoing obligations, from the $50.0 million upfront payment Lineage received from Roche in January 2022, Lineage paid $12.1 million to the IIA and $8.9 million to Hadasit. See “—Grants from Government Entities,” below, and Note 14 (Commitments and Contingencies) to our consolidated financial statements included in this report for additional information related to our obligations to the IIA and Hadasit.
ITI Collaboration Agreement
On April 16, 2021, Lineage entered a worldwide license and development collaboration with ITI (the “ITI Agreement”). Lineage is the sole and exclusive owner of the rights to the VAC platform and has licensed to ITI patents and materials for the development and commercialization of a novel cancer immunotherapy agent derived from this platform utilizing an antigen provided by ITI.
Under terms of the ITI Agreement, Lineage is entitled to initial fees totaling up to $2.0 million, which we have received $1.0 million , and up to an additional $67.0 million in development and commercial milestones across multiple indications. Lineage will also be eligible to receive royalties of up to 10% on net sales of future products. ITI has received a research and development grade of the VAC-CMV product and is evaluating its next steps.
Grants from Government Entities
Grants from the Israeli Innovation Authority
Under the Israeli Encouragement of Research, Development and Industrial Initiative Technology Law, 5744-1984, as amended, and related regulations (collectively, the “Innovation Law”), research and development programs which meet specified criteria and are approved by the Israel Innovation Authority (the “IIA”) are eligible for grants of up to 50% of the project’s expenditure, as determined by the research committee, in exchange for the payment of royalties from the revenues generated from the sale of product candidates and related services developed, in whole or in part pursuant to, or as a result of, a research and development program funded by the IIA. The royalties are generally at a range of 3.0% to 5.0% of revenues until the entire IIA grant is repaid, together with an annual interest generally tied to an interest rate index.
Under the Innovation Law, the manufacture of product candidates developed with government grants is required to be performed in Israel. The transfer of manufacturing activity outside Israel may be subject to the prior approval of the IIA, and if approved, may increase the royalties payable to the IIA, in certain cases substantially. The amount of the increase in the royalties payable depends on the percentage of manufacturing activity that occurs outside Israel.
The know-how developed within the framework of the Innovation Law plan may not be transferred to third parties outside Israel without the prior approval of a governmental committee chartered under the Innovation Law. The IIA approval to transfer know-how created, in whole or in part, in connection with an IIA-funded project to a third party outside Israel where the transferring company remains an operating Israeli entity is subject to payment of a redemption fee to the IIA calculated according to a formula provided under the Innovation Law that is based, in general, on the ratio between the aggregate IIA grants to the company’s aggregate investments in the project that was funded by these IIA grants, multiplied by the transaction consideration. The transfer of such know-how to a party outside Israel where the transferring company ceases to exist as an Israeli entity is subject to a redemption fee formula that is based, in general, on the ratio between the aggregate IIA grants to the total financial investments in the company, multiplied by the transaction consideration. The redemption fee in case of transfer of know-how to a party outside Israel is generally based on the ratio between the aggregate IIA grants received by the company and the company’s aggregate research and development expenses. The fee is multiplied by the transaction consideration, and the maximum amount payable to the IIA in case of transfer of know-how outside Israel will not exceed six times the value of the grants received plus interest. In the event that the receiver of the grants ceases to be an Israeli corporation such payment shall not exceed six times the value of the grants received plus interest, with a possibility to reduce such payment to up to three times the value of the grants received plus interest if the research and development activity remains in Israel for a period of three years after payment to the IIA.
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The restrictions under the Innovation Law, including restrictions on the sale, transfer or licensing to a non-Israeli entity of know-how developed as part of the programs under which the grants were given, continue to apply even after the repayment of royalties in full by the grant recipient.
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 comply with, and to ensure the compliance by Cell Cure with, the Innovation Law. We therefore must comply with the requirements of the Innovation Law and related regulations. To date, through a series of separate grants beginning in 2007, Cell Cure received a total of $15.4 million from the IIA to support the OpRegen program. See Note 14 (Commitments and Contingencies) to our consolidated financial statements included in this report for additional information.
Grants from the California Institute for Regenerative Medicine
The clinical development of OPC1 has been supported by $14.3 million of grants from CIRM, a state agency established to fund stem cell research and development of new stem cell-based treatments. The terms of our grant award from CIRM require royalty payments to the California State General Fund based on net commercial revenue from the sale of any product, drug or service arising from CIRM-funded research as follows: 0.1% per $1.0 million of funds granted for the earlier of 10 years or nine times the award amount that has been paid. In addition, a 1% royalty will be owed on net commercial revenue in excess of $500 million per year until the last to expire patent covering a CIRM-funded invention, if any, contributed towards the commercialization of the product.
Other Programs
We may elect to develop additional product candidates currently in the earliest stages of development and which cover a range of therapeutic areas. Generally, these product candidates are still conceptual but are based on the same pluripotent platform technology and would employ a similar guided cell differentiation and transplant approach as our current clinical-stage products.
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Patents and Trade Secrets
We seek to protect and rely on our proprietary cell-based therapy platform and associated development and manufacturing capabilities and derived product candidates through a variety of methods, including seeking and maintaining patents intended to cover our products and compositions, their methods of use and processes for their manufacture, our platform technologies and any other inventions that are commercially important to the development of our business. We also rely on contractual obligations with employees and third parties to protect our proprietary rights. For example, in addition to protecting our proprietary rights with patents, we rely on unpatented trade secrets, improvements, know-how and innovation, and we take steps necessary to protect these rights, including through confidentiality agreements with our corporate partners, employees, consultants and vendors. We have sought, and intend to continue to seek, appropriate patent protection for important and strategic components of our proprietary technologies by filing patent applications in the United States and internationally. We may also file additional patent applications, when appropriate, to cover improvements on our clinical products, clinical product candidates, and related technologies. There are no assurances that any of our intellectual property rights will guarantee complete or adequate protection or market exclusivity for our products and product candidates. We also enter into collaborative and other similar arrangements with third parties, such as license agreements, to in-license and/or out-license intellectual property rights. Our financial success will be dependent, in part, on our ability to obtain rights to commercially valuable patents, to protect and enforce our intellectual property rights and to operate without infringing any intellectual property rights of others. From time to time, we assess our patents and pending applications covering our products and product candidates. If we determine that any patents or patent applications no longer provide adequate or necessary protection, we may transfer or abandon such patents and patent applications to avoid incurring unnecessary costs.
We own or license, directly or through our subsidiaries, patent families that include several hundreds of U.S. and international patents and patent applications. We cannot be certain that issued patents will be enforceable or provide adequate protection or that pending applications will result in issued patents.
OpRegen®
We have rights to issued U.S. and international patents and pending patent applications covering OpRegen. The issued patents have expiration dates ranging from 2028 to 2036. The pending applications, if issued, will have estimated expiration dates ranging from 2028 to 2042. These U.S. and international issued patents and pending applications also include those in-licensed from Hadasit, a wholly owned subsidiary of Hadassah Medical Organization. We also solely own pending U.S. and international patent applications relating to a cryopreserved thaw-and-inject formulation. The U.S. patent applications, and any filed international patent applications based on the PCT applications, if issued, will have estimated expiration dates in 2038. Pursuant to the Roche Agreement, we have licensed these patent rights to Roche to further develop and commercialize RPE cell therapies, including OpRegen (see “—Collaborations—Roche Collaboration Agreement” above).
OPC1
We have numerous U.S. and international issued patents and pending patent applications that are relevant to neural cells, such as oligodendrocyte progenitor cells, including patent families acquired from Geron Corporation (“Geron”) that are directed to the differentiation of pluripotent stem cells, including human embryonic stem (“hES”) cells, into various neural cell types, as well as various culture and purification methods. Additionally, there are four patent families with pending patent applications owned by us directed to improved methods of producing oligodendrocyte progenitor cells, oligodendrocyte progenitor cell compositions, and methods of treatment of spinal cord injury using oligodendrocyte progenitor cells. The estimated expiration dates of the four patent families with pending applications owned by us range from 2036 to 2043. The commercial success of OPC1 depends, in part, upon our ability to exclude competition for this product with the existing patent portfolio, regulatory exclusivity, undisclosed know-how and/or trade secrets, or a combination of these barriers to entry.
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VAC Platform
We have numerous U.S. and international issued patents and pending patent applications that are relevant to dendritic cells, including patent families acquired from Geron or in-licensed from third parties that are directed to the differentiation of pluripotent stem cells, including hES cells, into hematopoietic progenitor cells and immature and mature dendritic cells. In addition, these patent rights include a patent family with claims directed to immunogenic compositions comprising antigen-presenting dendritic cells and methods of eliciting an anti-telomerase immune response in a subject by administering to the subject such compositions. The expiration dates of the patents, and the estimated expiration dates of the pending applications, acquired from Geron or in-licensed to us range from 2022 to 2029. We also solely own pending U.S. and international patent applications relating to VAC and VAC processes with estimated expiration dates, if issued, from 2041 to 2043. The commercial success of VAC products depends, in part, upon our ability to exclude competition in these products with this patent portfolio, regulatory exclusivity, undisclosed know-how and/or trade secrets, or a combination of these barriers to entry.
Auditory Neurons
We have a pending U.S. provisional patent application for our ANP1 program. It is anticipated that this provisional patent application will be converted to a U.S. utility patent application and one or more international patent applications in 2023 and, if issued, would have estimated patent expiration dates of 2043.
Photoreceptors
We have pending U.S. and international patent applications for our PNC1 program. These pending patent applications include a patent family licensed from Hadasit and a patent family solely owned by Lineage. The pending patent applications licensed from Hadasit, if issued, would have estimated patent expiration dates of 2038. The pending patent applications owned by Lineage, if issued, would have estimated patent expiration dates of 2036. We also have a pending U.S. provisional patent application jointly owned with Hadasit. It is anticipated that this provisional patent application will be converted to a U.S. utility patent application and one or more international applications in 2023 and, if issued, would have estimated patent expiration dates of 2043.
General Risks Related to Obtaining and Enforcing Patent Protection
Because patent applications are confidential until a patent application is published or a patent is issued, we may not know if our competitors have filed patent applications for technology covered by our pending applications or if we were the first to invent or first to file an application directed toward the technology that is the subject of our patent applications. Competitors may have filed patent applications or received patents and may obtain additional patents and proprietary rights that block or compete with our products. In addition, if competitors file patent applications covering our technology, we may have to participate in interference/derivation proceedings or litigation to determine the right to a patent. Litigation and interference/derivation proceedings are unpredictable and expensive, such that, even if we are ultimately successful, our results of operations may be adversely affected by such events. Accordingly, there is a risk that any patent applications that we file and any patents that we hold or later obtain could be challenged by third parties and be declared invalid in view of third-party patent applications and/or patents. 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. We may also face challenges to our patent and regulatory protections covering our products by third parties, including manufacturers of generics and biosimilars that may choose to launch or attempt to launch their products before the expiration of our patent or regulatory exclusivity. Litigation, interference, oppositions, inter partes’ reviews, administrative challenges or other similar types of proceedings are unpredictable and may be protracted, expensive and distracting to management. The outcome of such proceedings could adversely affect the validity and scope of our patent or other proprietary rights, hinder our ability to manufacture and market our products, require us to seek a license for the infringed product or technology or result in the assessment of significant monetary damages against us that may exceed any amounts that we may accrue on our financial statements as a reserve for contingent liabilities. An adverse determination in a judicial or administrative proceeding or a failure to obtain necessary licenses could prevent us from manufacturing or selling our products. Furthermore, payments under any licenses that we are able to obtain would reduce our profits derived from the covered products and services.
The enforcement of patent rights often requires litigation against third-party infringers, and such litigation can be costly to pursue. Even if we succeed in having new patents issued or in defending any challenge to issued patents, there is no assurance that our patents will be comprehensive enough to provide us with meaningful patent protection against our competitors.
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Employees
As of December 31, 2022, we had 78 employees, of which 25 were employed by Lineage and 53 were employed by Cell Cure and work in Israel. Of the 78 employees, 70 were employed on a full-time basis and eight were employed on a part-time basis. Eleven employees hold Ph.D. degrees in one or more fields of science or doctorates in medicine. None of our employees are covered by a collective bargaining agreement.
Manufacturing
Manufacturing of pluripotent-derived products is complex and requires the use of innovative technologies to handle living cells. Manufacturing these products requires facilities specifically designed for and validated for this purpose and specific quality assurance and quality control procedures are necessary. Currently, all of our cGMP manufacturing processes, including cell banking and product manufacturing for our cell therapy product candidates, are conducted at our facility in Jerusalem, Israel. The facility, which includes process development laboratories and a cGMP manufacturing facility, is designed and equipped to enable simultaneous cGMP processes and to produce a range of cell therapy products for human use in clinical trials as well as at a scale suitable for commercial launch.
Our process development and manufacturing are designed to address the complexity of manufacturing cell-based therapies with a specific focus on the reproducibility and scale of the manufacturing process. To this end each of our manufacturing processes contains predefined steps that are controlled by a specific set of control tests that allow us to follow up the progression of production according to the manufacturing plan, We implement a variety of 2-dimensional and 3-dimensional culture conditions to address the specific requirements of our pre-defined differentiation processes of the pluripotent cell into a functional cell product.
We obtain key components required for the manufacture of our cell therapy product candidates from third-party manufacturers and suppliers, which include, in some instances, sole source manufacturers and suppliers. We do not currently have long-term commitments or supply agreements in place to obtain certain key components used in the manufacture of our cell therapy product candidates.
Licensed Technology and Product Development Agreements
Lineage has obtained the right to use various technologies that we believe have great potential in our product development efforts, and that may be useful to other companies that are engaged in the research and development of products for human therapeutic and diagnostic use.
Second Amendment to Clinical Trial and Option Agreement and License Agreement with Cancer Research UK
In March 2020, Lineage and its wholly owned subsidiary Asterias entered into a Second Amendment to Clinical Trial and Option Agreement (the “CTOA Amendment”) with CRUK and CRT, which amends the Clinical Trial and Option Agreement entered into between Asterias, CRUK and CRT dated September 8, 2014, as amended September 8, 2014. Pursuant to the CTOA Amendment, Lineage assumed all obligations of Asterias and exercised early its option to acquire data generated in the Phase 1 clinical trial of VAC2 in non-small cell lung cancer being conducted by CRUK.
Either party may terminate the CRT License Agreement for the uncured material breach of the other party. CRT may terminate the CRT License Agreement in the case of Lineage’s insolvency or if Lineage ceases all development and commercialization of all products under the CRT License Agreement.
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WARF Agreements
We have rights to certain U.S and international issued patents, pending patent applications, and stem cell lines with the Wisconsin Alumni Research Foundation (“WARF”) under a Commercial License and Option Agreement entered into between Lineage and WARF in January 2008 and a Non-Exclusive License Agreement entered into between Asterias and WARF in October 2013 (collectively, the “WARF Agreements”).
Under the WARF Agreements, we have a worldwide non-exclusive license under certain WARF patents and WARF-owned primate (including human) stem cell lines covered by such patents for use in internal research, and to make, use and sell products that are used as research tools and products that are discovered or developed through our internal research using such patents and stem cells. We paid upfront license fees and have agreed to additional payments upon the attainment of specified clinical development milestones, royalties on sales of commercialized products, and, subject to certain exclusions, a percentage of any payments that we may receive from any sublicenses that we may grant to use the licensed patents or stem cell lines.
The WARF Agreements will terminate with respect to licensed patents upon the expiration of the last licensed patent to expire and with respect to licensed cell lines until terminated by a party. We may terminate the WARF Agreements at any time with prior written notice, and WARF may terminate the WARF Agreements upon a breach. We have agreed to indemnify WARF and certain other designated affiliated entities from liability arising out of or relating to the death or injury of any person or damage to property due to the sale, marketing, use or manufacture of products that are covered by the licensed patents, licensed stem cell lines or inventions or materials developed or derived from the licensed patents or stem cell lines.
Royalty Agreement with Geron
In connection with Asterias’s acquisition of Geron’s stem cell assets in October 2013, we entered into a royalty agreement with Geron (the “Royalty Agreement”) pursuant to which we agreed to pay Geron a 4% royalty on net sales by us or any of our affiliates or sales agents of any products that we develop and commercialize that are covered by the patents Geron contributed to us. In the case of sales of such products by a person other than us or one of our affiliates or sales agents, we will be required to pay Geron 50% of all royalties and cash payments received by us or by our affiliate in respect of a product sale. The Royalty Agreement will terminate at the expiration or termination date of the last issued patent contributed by Geron under the Royalty Agreement. We estimate that the latest patent expiration date will be in 2029.
Government Regulation
Government authorities at the federal, state and local level, and in other countries, extensively regulate among other things, the development, testing, manufacture, quality, approval, safety, efficacy, distribution, labeling, packaging, storage, record keeping, marketing, import/export and promotion of drugs, biologics, and medical devices. Authorities also heavily regulate many of these activities for human cells, tissues, and cellular and tissue-based products (“HCT/Ps”).
FDA and Foreign Regulation of Therapeutic Products
The FDA and foreign regulatory authorities will regulate our proposed products as drugs, biologics or medical devices, depending upon such factors as the use to which the product will be put, the chemical composition, and the interaction of the product with the human body. In the United States, the FDA regulates drugs, biologics and medical devices, among other things, under the Federal Food, Drug and Cosmetic Act (“FDCA”), the Public Health Service Act (“PHSA”), and implementing regulations. In addition, establishments that manufacture human cells, tissues, and cellular and tissue-based products (“HCT/Ps”) are subject to additional regulations, including registration and listing requirements and current good tissue practices. Certain proposed cell therapy products will be reviewed by the FDA staff in its Center for Biologics Evaluation and Research Office of Therapeutic Products (“OTP”).
Our domestic human drug and biologic products will be subject to rigorous FDA review and approval procedures. After testing in animals to evaluate the potential efficacy and safety of the product candidate, an IND submission must be made to the FDA to obtain authorization for human testing. Extensive clinical testing, which is generally done in three phases, must then be undertaken to demonstrate optimal use, safety, and efficacy of each product in humans. Each clinical trial is conducted under the auspices of an independent Institutional Review Board (“IRB”). The IRB will consider, among other things, ethical factors, the safety of human subjects, and the possible liability of the institution.
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Phase 1 clinical trials are conducted in a small number of healthy volunteers or volunteers with the target disease or condition to assess safety and dosage. Phase 2 clinical trials are conducted with groups of patients afflicted with the target disease or condition in order to determine preliminary efficacy, optimal dosages and expanded evidence of safety. In some cases, an initial trial is conducted in diseased patients to assess both preliminary safety and preliminary efficacy, in which case it is referred to as a Phase 1/2 clinical trial. Phase 3 clinical trials are large-scale, multi-center, comparative trials and are conducted with patients afflicted with the target disease or condition in order to provide enough data to demonstrate the efficacy and safety required by the FDA. The FDA closely monitors the progress of each of the three phases of clinical testing and may, at its discretion, re-evaluate, alter, suspend or terminate the clinical trial based upon the data which have been accumulated to that point and its assessment of the risk/benefit ratio to the intended patient population. The clinical trial sponsor is required to report adverse events to the FDA and IRB in accordance with FDA laws and regulations. Monitoring of all aspects of the trial to minimize risks is a continuing process.
No action can be taken to market any therapeutic product in the U.S. until an appropriate New Drug Application (“NDA”) or Biologics License Application (“BLA”) has been approved by the FDA. Submission of the application is not a guarantee that the FDA will find it complete and accept it for filing. If an application is accepted for filing, following the FDA’s review, the FDA may grant marketing approval, or deny the application by way of a complete response letter if it determines that the application does not provide an adequate basis for approval. FDA regulations also restrict the export of therapeutic products for clinical use prior to FDA approval. Before approving an NDA or BLA, the FDA will inspect the facilities at which the product is manufactured or perform an establishment file review of the site. The FDA will not approve the product unless it determines that the manufacturing processes and facilities are in compliance with the requirements of current Good Manufacturing Practices (“cGMP”) and adequate to assure consistent production of the product within required specifications including good tissue practices (“GTPs”) to the extent applicable. GMPs are FDA regulations that detail minimum requirements for the methods, facilities, and controls used in manufacturing, processing, and packing of a drug product. GTPs are FDA regulations and guidance documents that govern the methods used in, and the facilities and controls used for, the manufacture of HCT/Ps. The primary intent of the GTP requirements is to ensure that cell and tissue-based products are manufactured in a manner designed to prevent the introduction, transmission and spread of communicable disease. FDA regulations also require HCT/P establishments to register and list their HCT/Ps with the FDA and, when applicable, to evaluate donors through screening and testing. To maintain compliance with cGMPs, GTPs, and GCPs, an applicant must incur significant expenditure of time, money and effort in the areas of training, record keeping, production, and quality control.
To date, the FDA has not granted marketing approval to any pluripotent stem cell-based therapeutic products, and it is possible that the FDA or foreign regulatory agencies may subject our product candidates to additional or more stringent review than drugs or biologics derived from other technologies.
The FDA offers several programs to expedite development of products that treat serious or life-threatening illnesses and that provide meaningful therapeutic benefits to patients over existing treatments. A drug is eligible for designation as an RMAT if: the drug is a regenerative medicine therapy, which is defined as a cell therapy, therapeutic tissue engineering product, human cell and tissue product or any combination product using such therapies or products, except for those regulated solely under Section 361 of the Public Health Service Act; the drug is intended to treat, modify, reverse or cure a serious or life-threatening disease or condition; and preliminary clinical evidence indicates that the drug has the potential to address unmet medical needs for such disease or condition.
Under the Orphan Drug Act, the FDA may grant orphan designation to a drug or biologic intended to treat a rare disease or condition, which is a disease or condition that affects fewer than 200,000 individuals in the United States, or if it affects more than 200,000 individuals in the United States, there is no reasonable expectation that the cost of developing and making available a drug or biologic for this type of disease or condition will be recovered from sales in the United States for that drug or biologic. Orphan drug designation is a separate process from seeking an NDA or BLA. After the FDA grants orphan drug designation, the generic identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. The orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review or approval process.
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If a product that has orphan drug designation subsequently receives the first FDA approval for the disease for which it has such designation, the product may be entitled to orphan drug exclusivity, which means that the FDA may not approve any other applications, including a full NDA or BLA, to market the same drug biologic for the same indication for seven years, except in limited circumstances, such as a showing of clinical superiority to the product with orphan drug exclusivity. Orphan drug exclusivity does not prevent FDA from approving a different drug or biologic for the same disease or condition, or the same drug or biologic for a different disease or condition. Among the other benefits of orphan drug designation are tax credits for certain research and a waiver of the NDA or BLA application fee. A designated orphan drug may not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation. In addition, exclusive marketing rights in the United States may be lost if the FDA later determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantities of the product to meet the needs of patients with the rare disease or condition.
Combination Products
Combination products are defined by the FDA to include products comprised of two or more regulated components or parts such as a biologic and a device. When regulated independently, biologics and devices each have their own regulatory requirements. However, the regulatory requirements for a combination product comprised of a biologic administered with a delivery device can be more complex, because in addition to the individual regulatory requirements for each component, additional combination product regulatory requirements may apply. The Office of Combination Products at the FDA coordinates the review of such products and determines the primary mode of action of a combination product. The definition and regulatory requirements for combination products may differ significantly among countries in which we may seek approval of our product candidates.
FDA Regulation of Manufacturing
The FDA regulates the manufacturing process of pharmaceutical products, human tissue and cell products, and medical devices, requiring that they be produced in compliance with cGMP and cGTP. See “Manufacturing.” The FDA regulates and inspects equipment, facilities, laboratories and processes used in the manufacturing and testing of products prior to providing approval to market products. If after receiving approval from the FDA, a material change is made to manufacturing equipment or to the location or manufacturing process, additional regulatory review may be required. The FDA also conducts regular, periodic visits to re-inspect the equipment, facilities, laboratories and processes of manufacturers following an initial approval. If, as a result of those inspections, the FDA determines that equipment, facilities, laboratories or processes do not comply with applicable FDA regulations and conditions of product approval, the FDA may seek civil, criminal or administrative sanctions and/or remedies against the manufacturer, including suspension of manufacturing operations. Issues pertaining to manufacturing equipment, facilities or processes may also delay the approval of new products undergoing FDA review.
FDA Regulation of Advertising and Product Promotion
The FDA also regulates the content of advertisements used to market pharmaceutical and biologic products. Claims made in advertisements concerning the safety and efficacy of a product, or any advantages of a product over another product, must be supported by clinical data filed as part of an NDA, a BLA, or an amendment to an NDA or a BLA, and must be consistent with the FDA-approved labeling and dosage information for that product.
Pharmaceutical and biologic products may be promoted only for the approved indications in accordance with the approved label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label may be subject to significant liability. However, physicians may, in their independent medical judgment, prescribe legally available products for off-label uses. The FDA does not regulate the behavior of physicians in their choice of treatments but the FDA does restrict manufacturer’s communications on the subject of off-label use of their products.
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Foreign Regulation
Sales of pharmaceutical products outside the U.S. are subject to foreign regulatory requirements that vary widely from country to country. Even if FDA approval has been obtained, approval of a product by comparable regulatory authorities of foreign countries must be obtained prior to the commencement of marketing the product in those countries. The time required to obtain such approval may be longer or shorter than that required for FDA approval.
Federal Funding and State Regulations
Effective July 7, 2009, the NIH adopted guidelines on the use of hES cells in federally funded research. The central focus of the guidelines is to assure that hES cells used in federally funded research are derived from human embryos that were created for reproductive purposes, are no longer needed for this purpose, and are voluntarily donated for research purposes with the informed written consent of the donors. hES cells that were not derived in compliance with the guidelines, are not eligible for use in federally funded research.
The State of California has adopted legislation and regulations that require institutions that conduct stem cell research to notify, and in certain cases obtain approval from, a Stem Cell Research Oversight Committee (“SCRO Committee”) before conducting the research. Under certain California regulations, all hES cell lines used in our research must be acceptably derived. California regulations further require certain records to be maintained with respect to stem cell research and the materials used. Lineage programs that involve the use of stem cells have been reviewed by a SCRO Committee to confirm compliance with federal and state guidelines.
The hES cell lines that we use are all on the NIH registry of lines that have been reviewed and meet standards for federal funding grants. All of our research programs utilize stem cells from established and well-characterized cell lines and which are capable of self-renewal and expansion through normal cellular division (mitosis). Our research programs do not require new tissue or cells from donors of any kind.
Health Insurance Portability and Accountability Act and Other Health Information Privacy and Security Laws
The Health Insurance Portability and Accountability Act (“HIPAA”), as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”), and their respective implementing regulations impose obligations 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, with respect to protecting the privacy, security, and transmission of protected health information. HIPAA also regulates standardization of data content, codes and formats used in healthcare transactions and standardization of identifiers for covered health plans and providers. Penalties for violations of HIPAA regulations include civil and criminal penalties. Additionally, HITECH created four new tiers of civil monetary penalties, amended HIPAA to make civil and criminal penalties directly applicable to business associates, and gave state attorneys general new authority to file civil actions for damages or injunctions in U.S. federal courts to enforce HIPAA and seek attorneys’ fees and costs associated with pursuing federal civil actions. In addition, certain state and foreign laws also govern the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.
Privacy and Data Security Laws
In the ordinary course of our business, we may collect, receive, store, process, generate, use, transfer, disclose, make accessible, protect, secure, dispose of, transmit, and share (collectively, processing) personal data and other sensitive information, including data we collect about trial participants in connection with clinical trials. Accordingly, we are, or may become, subject to numerous data privacy and security requirements related to data privacy, security, and protection under federal, state, local, and foreign laws, regulations, guidance, and industry standards. Compliance with such requirements increases the cost and complexity of doing business and non-compliance may result in, among other penalties and sanctions, substantial monetary fines. The data privacy, security, and protection laws to which we may be subject include, without limitation, the Federal Trade Commission Act, the California Consumer Privacy Act of 2018 (“CCPA”), as amended by the California Privacy Rights Act of 2020 (“CPRA”), Israel’s Protection of Privacy Law 5741-1981, the European Union’s General Data Protection Regulation 2016/679 (“EU GDPR”), the EU GDPR as it forms part of United Kingdom (“UK”) law by virtue of section 3 of the European Union (Withdrawal) Act 2018 (“UK GDPR”), and the ePrivacy Directive. In addition, several states within the United States have enacted or proposed data privacy laws, including Virginia, Colorado, Connecticut and Utah.
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The CCPA and EU GDPR are examples of increasingly stringent and evolving regulatory frameworks related to personal data processing, which increase compliance obligations and exposure for noncompliance. For example, the CCPA imposes obligations on covered businesses to provide specific disclosures related to a business’s collection, use, and disclosure of personal data and a requirement to respond to certain requests from California residents related to their personal data. Also, the CCPA provides for civil penalties and a private right of action for certain data breaches. Under the CPRA, effective January 1, 2023, California residents also have the ability to limit use of certain sensitive personal data, establish restrictions on personal data retention, expand the types of data breaches that are subject to the CCPA’s private right of action. A new California Privacy Protection Agency was also established to implement and enforce the new law. U.S. federal and state consumer protection laws require us to publish statements that accurately and fairly describe how we handle personal data and choices individuals may have about the way we handle their personal data. The EU GDPR applies to any company established in the European Economic Area (“EEA”) and to companies established outside the EEA that process personal data in connection with the offering of goods or services to data subjects in the EEA or the monitoring of the behavior of data subjects in the EEA. These obligations may include limiting personal data processing to only what is necessary for specified, explicit, and legitimate purposes; requiring a legal basis for personal data processing; requiring the appointment of a data protection officer in certain circumstances; increasing transparency obligations to data subjects; requiring data protection impact assessments in certain circumstances; limiting the collection and retention of personal data; increasing rights for data subjects; formalizing a heightened and codified standard of data subject consents; requiring the implementation and maintenance of technical and organizational safeguards for personal data; mandating notice of certain personal data breaches to the relevant supervisory authority(ies) and affected individuals; and mandating the appointment of representatives in the UK and/or the EU in certain circumstances. Moreover, under the EU GDPR, government regulators may impose temporary or definitive bans on data processing, as well as fines of up to 20 million euros or 4% of a company’s annual global revenue, whichever is greater. Further, individuals may initiate litigation related to processing of their personal data. In addition, Israel’s Protection of Privacy Law 5741-1981 and the regulations promulgated thereunder impose certain obligations with respect to the manner personal data is processed, and government regulators may issue fines or sanctions for non-compliance.
Certain jurisdictions have enacted data localization laws and cross-border personal data transfer laws, which could make it more difficult to transfer information across jurisdictions (such as transferring or receiving personal data that originates in the EU or in other foreign jurisdictions). Existing mechanisms that facilitate cross-border personal data transfers may change or be invalidated. For example, absent appropriate safeguards or other circumstances, the EU GDPR generally restricts the transfer of personal data to countries outside of the EEA, such as the United States, that the European Commission does not consider to provide an adequate level of data privacy and security. The European Commission released a set of “Standard Contractual Clauses” (“SCCs”), that are designed to be a valid mechanism to facilitate personal data transfers out of the EEA to these jurisdictions. Currently, these SCCs are a valid mechanism to transfer personal data outside of the EEA, but there exists some uncertainty regarding whether the SCCs will remain a valid mechanism. Additionally, the SCCs impose additional compliance burdens, such as conducting transfer impact assessments to determine whether additional security measures are necessary to protect the at-issue personal data. In addition, Switzerland and the UK similarly restrict personal data transfers outside of those jurisdictions to countries, such as the United States, that do not provide an adequate level of personal data protection, and certain countries outside Europe (e.g., Israel) have also passed or are considering laws requiring local data residency or otherwise impeding the transfer of personal data across borders.
Federal and State Fraud and Abuse Laws
A variety of federal and state laws prohibit fraud and abuse. These laws are interpreted broadly and enforced aggressively by various state and federal agencies, including the Centers for Medicare & Medicaid Services (“CMS”), the Department of Justice, the Office of Inspector General for the U.S. Department of Health and Human Services (“HHS”), and various state agencies. In addition, the Medicare and Medicaid programs increasingly use a variety of contractors to review claims data and to identify improper payments as well as fraud and abuse. These contractors include Recovery Audit Contractors, Medicaid Integrity Contractors and Zone Program Integrity Contractors. In addition, CMS conducts Comprehensive Error Rate Testing audits, the purpose of which is to detect improper Medicare payments. Any overpayments identified must be repaid unless a favorable decision is obtained on appeal. In some cases, these overpayments can be used as the basis for an extrapolation, by which the error rate is applied to a larger universe of claims, and which can result in even higher repayments.
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The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting, receiving, or providing remuneration, directly or indirectly, to induce or in return for either the referral of an individual, or the furnishing, recommending, or arranging for the purchase, lease or order of any healthcare item or service reimbursable, in whole or in part, under a federal healthcare program. The definition of “remuneration” has been broadly interpreted to include anything of value, including gifts, discounts, credit arrangements, payments of cash, ownership interests and providing anything at less than its fair market value. Recognizing that the federal Anti- Kickback Statute is broad and may prohibit certain common activities within the healthcare industry, the Office of Inspector General for HHS has issued a series of statutory exceptions and regulatory “safe harbors.” However, these exceptions and safe harbors are drawn narrowly and require strict compliance in order to offer protection from prosecution under the federal Anti-Kickback Statute. Although payment and business practices that meet the requirements of a safe harbor are not treated as offenses under the federal Anti-Kickback Statute, the failure of a transaction or arrangement to fit within a specific safe harbor does not necessarily mean that the transaction or arrangement is illegal or that prosecution under the federal Anti-Kickback Statute will be pursued. However, conduct and business arrangements that do not fully satisfy all requirements of an applicable safe harbor may result in increased scrutiny by government enforcement authorities and would be evaluated on a case-by-case basis based on a cumulative review of their facts and circumstances. Additionally, the Patient Protection and Affordable Care Act, as amended by the Healthcare and Education Reconciliation Act (collectively, the “ACA”) codified case law that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal False Claims Act.
The federal civil and criminal false claims laws, including the federal False Claims Act, which can be enforced by private citizens on behalf of the government, through civil whistleblower or qui tam actions, 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. Pharmaceutical and other healthcare companies have been prosecuted under these laws for alleged off-label promotion of drugs, purportedly concealing price concessions in the pricing information submitted to the government for government price reporting purposes, and allegedly providing free product to customers with the expectation that the customers would bill federal healthcare programs for the product. As a result of a modification made by the Fraud Enforcement and Recovery Act of 2009, a claim includes “any request or demand” for money or property presented to the U.S. government. In addition, manufacturers can be held liable under the federal False Claims Act even when they do not submit claims directly to government payors if they are deemed to “cause” the submission of false or fraudulent claims.
HIPAA also created new federal crimes, including healthcare fraud and false statements relating to healthcare matters. The healthcare fraud statute prohibits knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private third-party payers. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.
The federal Physician Payments Sunshine Act which require certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to CMS information related to payments or other transfers of value made to physicians (defined to include doctors, dentists, optometrists, podiatrists, and chiropractors), certain other healthcare professionals (such as physician assistants and nurse practitioners), and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members.
Many states have laws similar to the federal laws described above and the state laws may be broader in scope and may apply regardless of payor, such as state anti-kickback and false claims laws that may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third party payors, including private insurers, or that apply regardless of payor, 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, state and local laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures, state laws that require the reporting of information related to drug pricing, and state and local laws requiring the registration of pharmaceutical sales representatives.
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Additionally, the U.S. Foreign Corrupt Practices Act (“FCPA”) prohibits U.S. corporations and their representatives from offering, promising, authorizing or making payments to any foreign government official, government staff member, political party or political candidate in an attempt to obtain or retain business abroad. The scope of the FCPA includes interactions with certain healthcare professionals in many countries. Other countries have enacted similar anti-corruption laws and/or regulations.
If our operations are found to be in violation of any of the laws described above, or any other governmental regulations that apply to us, we may be subject to significant civil, criminal and administrative penalties, including sanctions, damages, disgorgement, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, imprisonment, integrity oversight and reporting obligations, contractual damages, reputational harm, diminished profits and future earnings, and curtailment or restructuring of our operations.
Coverage and Reimbursement
Patients generally rely on third-party payors to reimburse part or all of the costs associated with medical products. Accordingly, market acceptance of medical products can depend on the extent to which third-party coverage and reimbursement is available from government health administration authorities, private healthcare insurers and other healthcare funding organizations. 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. Pharmaceutical companies may be required to provide specified rebates or discounts on the products it sells to certain government funded programs, including Medicare and Medicaid, and those rebates or discounts have increased over time. The ACA increased many of these mandatory discounts and rebates required and imposed a new branded prescription pharmaceutical manufacturers and importers fee payable each year by certain pharmaceutical companies and manufacturers.
Outside of the United States, 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. Historically, products launched in the EU do not follow price structures of the United States and generally tend to be significantly lower.
Healthcare Reform
The United States and some foreign jurisdictions are considering or have enacted a number of reform proposals to change the healthcare system. There is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality or expanding access. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by federal and state legislative initiatives, including those designed to limit the pricing, coverage, and reimbursement of pharmaceutical and biopharmaceutical products, especially under government-funded healthcare programs, and increased governmental control of drug pricing.
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In March 2010, the ACA was signed into law, which substantially changed the way healthcare is financed by both governmental and private insurers in the United States, and significantly affected the pharmaceutical industry. The ACA contains a number of provisions of particular import to the pharmaceutical and biotechnology industries, including, but not limited to, those governing enrollment in federal healthcare programs, a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected, and annual fees based on pharmaceutical companies’ share of sales to federal healthcare programs. Since its enactment, there have been judicial, Congressional, and executive branch challenges to certain aspects of the ACA. For example, legislation enacted in 2017, informally known as the Tax Cuts and Jobs Act (the “2017 Tax Act”), among other things, removes penalties for not complying with ACA’s individual mandate to carry health insurance. On June 17, 2021, the U.S. 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, 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 on February 15, 2021 and remained 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 and 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. On August 2, 2011, the Budget Control Act of 2011 was signed into law, which 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 2031, except for a temporary suspension from May 1, 2020 through March 31, 2022 due to the COVID-19 pandemic, unless additional Congressional action is taken. Under current legislation, the actual reduction in Medicare payments will vary from 1% in 2022 to up to 3% in the final fiscal year of this sequester. 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, on March 11, 2021, President Biden signed the American Rescue Plan Act of 2021 into law, which eliminates the statutory Medicaid drug rebate cap, currently set at 100% of a drug’s average manufacturer price, for single source and innovator multiple source drugs, beginning January 1, 2024. Congress is considering additional health reform measures.
Moreover, there has recently been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products, which has resulted in several presidential executive orders, 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 drug products. 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 concurrently released a final rule and guidance in September 2020 providing pathways for states to build and submit importation plans for drugs from Canada. Further, on November 20, 2020, the HHS 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 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 the rule was delayed until 2032 by the Inflation Reduction Act of 2022. 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. As a result of litigation challenging the Most Favored Nation model, on December 27, 2021 CMS published a final rule that rescinds the Most Favored Nation model interim final rule. Further, in July 2021, the Biden administration released an executive order that included multiple provisions aimed at prescription drugs. In response to President Biden’s executive order, on September 9, 2021, the HHS released a Comprehensive Plan for Addressing High Drug Prices that outlines principles for drug pricing reform. The plan sets out a variety of potential legislative policies that Congress could pursue as well as potential administrative actions HHS can take to advance these principles. No legislation or administrative actions have been finalized to implement these principles.
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In August 2022, the Inflation Reduction Act of 2022 was signed into law by President Biden. The new legislation has implications for Medicare Part D, which is a program available to individuals who are entitled to Medicare Part A or enrolled in Medicare Part B to give them the option of paying a monthly premium for outpatient prescription drug coverage. Among other things, the Inflation Reduction Act of 2022 requires manufacturers of certain drugs to engage in price negotiations with Medicare (beginning in 2026), with prices that can be negotiated subject to a cap; imposes rebates under Medicare Part B and Medicare Part D to penalize price increases that outpace inflation (first due in 2023); and replaces the Part D coverage gap discount program with a new discounting program (beginning in 2025). The Inflation Reduction Act of 2022 permits the Secretary of the HHS to implement many of these provisions through guidance, as opposed to regulation, for the initial years.
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.
Major Customers and Sources of Revenues
Major Sources of Revenues
The following table shows our major sources of revenues, as a percentage of total revenues, that were recognized during the years ended December 31, 2022 and 2021:
| Year Ended December 31, | ||||||||
| Sources of Revenues | 2022 | 2021 | ||||||
| Collaboration revenues | 90.9 | % | 25.8 | % | ||||
| Royalties | 9.1 | % | 63.9 | % | ||||
| IIA grant income (Cell Cure Neurosciences Ltd, Israel) | - | % | 10.3 | % | ||||
Geographic Area
The following table shows the geographic sources of revenue that were recognized during the years ended December 31, 2022 and 2021 (dollar amounts are in thousands):
| Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| United States | $ | 14,703 | $ | 3,895 | ||||
| Foreign(1) | - | 446 | ||||||
| Total revenues | $ | 14,703 | $ | 4,341 | ||||
| (1) | Foreign revenues are primarily generated from grants in Israel. |
Marketing
We do not have established marketing, sales or distribution infrastructure or capabilities. In order to commercialize any of our product candidates if approved for commercial sale, we must either establish a sales and marketing organization with technical expertise and supporting distribution capabilities or collaborate with third-parties that have sales and marketing experience. As we move our product candidates through development toward regulatory approval, we intend to evaluate options for each product candidate’s commercialization strategy. These options include building our own sales force and other commercial infrastructure, entering into strategic marketing partnerships with third parties, out-licensing the product to other pharmaceutical or biotechnology companies, and combinations of these strategies.
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Competition
The cell therapy industry is characterized by rapid innovation, intense and dynamic competition with a strong emphasis on proprietary products. While we believe that our technology, manufacturing capabilities, scientific knowledge, and experience in the field of cell therapy provide us with competitive advantages, we face potential competition from many different sources, including major pharmaceutical and biotechnology companies with substantially greater financial and other resources than we have, academic institutions and governmental agencies and public and private research institutions, as well as standard-of-care treatments, new products undergoing development and combinations of existing and new therapies. Any product candidates that we successfully develop and commercialize will compete with existing therapies and new therapies, including combinations thereof, that may become available in the future.
As mentioned above, some of our competitors have substantially greater financial and other resources than we have, such as larger research and development staff and well-established marketing and salesforces, or may operate in jurisdictions with lower standards of evidence to bring products to market. For example, we are aware that some of our competitors, including Bristol-Myers Squibb Company, Novo Nordisk A/S, Novartis AG, Johnson & Johnson, Merck & Co Inc., Gilead Sciences Inc., Astellas Pharma Inc., Bayer AG, BioNTech SE, Moderna Inc., Sana Biotechnology Inc., Senti Biosciences Inc., Iveric Bio Inc., Apellis Pharmaceuticals Inc., Century Therapeutics Inc., and Allogene Therapeutics Inc., may be conducting clinical trials for therapies that could compete with our cell therapy programs.
Corporate Information
Lineage is incorporated in the State of California. Our common shares trade on the NYSE American and the Tel Aviv Stock Exchange under the symbol “LCTX.” Our principal executive offices are at 2173 Salk Avenue, Suite 200, Carlsbad, CA 92008, USA, and our phone number at that address is (442) 287-8990. Our website address is www.lineagecell.com. The information on, or that can be accessed through our website, is not part of this report. Lineage routinely uses its website as a means of disclosing material non-public information and for complying with its disclosure obligations under Regulation FD. We also make available, free of charge through our website, our most recent annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports as soon as reasonably practicable after the reports are electronically filed with or furnished to the SEC.
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| ITEM 1A. | RISK FACTORS |
An investment in our common shares involves a high degree of risk. You should carefully consider all the risk factors described below, as well as the other information in this report, when evaluating our business and before deciding whether to purchase, hold or sell our common shares. Each of these risk factors, as well as additional risks not presently known to us or that we currently consider immaterial, could harm our business, financial condition, results of operations and/or growth prospects, as well as adversely affect the market price of our common shares, in which case you may lose all or part of your investment.
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 years ended December 31, 2022 and 2021 were $22.5 million and $49.2 million, respectively, and we had an accumulated deficit of $363.4 million as of December 31, 2022. Since inception, we have incurred significant operating losses and we expect to continue to incur significant operating losses for the foreseeable future. Unless and until we or a third-party collaborator succeed in developing, obtaining regulatory approval for, and generating substantial revenue from sales of one or more of our product candidates, we do not expect to become profitable. All of our product candidates will require substantial additional development time and resources before we or any collaborator would be able to apply for or receive any regulatory approval to market and sell a product, and the timeline for and outcome of these development efforts is highly uncertain. We anticipate our operating losses will increase substantially as we continue our development of, seek regulatory approval for and potentially commercialize our product candidates and seek to identify, assess, acquire, in-license or develop additional product candidates. We may never achieve profitability.
To become and remain profitable, we must succeed in developing and eventually commercializing products that generate significant revenue. This will require us and our collaborators to be successful in a range of challenging activities, including completing clinical and nonclinical studies of our product candidates, obtaining regulatory approval for these product candidates, manufacturing, marketing, and selling any approved products, and satisfying any post-marketing regulatory requirements. We are attempting to develop new technology and therapeutic products. Cell therapy is a nascent field with limited regulatory approval precedent, which makes it difficult to predict the time and cost of product candidate development and seeking regulatory approval. The regulatory pathway with the FDA and comparable foreign regulatory authorities may be more complex, time-consuming, and unpredictable relative to more well-known therapeutic approaches. We and our collaborators may never succeed in these activities and, even if we do, may never generate revenues that are significant enough for us to achieve profitability. If we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of our company and could impair our ability to raise capital, maintain our research and development efforts, expand our business, or continue our operations. A decline in the value of our company could also cause you to lose all or part of your investment.
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Our investigational allogeneic cell therapies represent a novel approach to the treatment of serious medical conditions, which gives rise to significant challenges. We or our collaborators may not succeed in developing any of our product candidates.
We are developing a pipeline of allogeneic cell therapy product candidates with cells that we create by applying proprietary differentiation protocols to established pluripotent cell lines and which must be either transplanted into patients to replace or support cells that are dysfunctional or absent due to degenerative disease or traumatic injury or administered by injection as a means of helping the body mount a more robust and effective immune response to cancer or infectious diseases. Allogeneic cell therapy is an area of therapeutic medical intervention that is still in its infancy, and as such, it is difficult to accurately predict the type and scope of challenges we and our collaborators may face during the development of our product candidates. We face significant challenges and uncertainties associated with the manufacture, preclinical and clinical development, regulatory approval pathway, and third-party payor coverage and reimbursement of our product candidates required for successful commercialization, including:
| ● | manufacturing our product candidates to our internal standards, as well as to that of applicable regulatory specifications, in a timely manner, and on the scale necessary to support larger-scale clinical trials, and, if approved, commercialization; | |
| ● | understanding and addressing variability in our cell manufacturing processes, which could affect our ability to produce clinical trial material and, if approved, commercial product in a reliable and consistent manner; | |
| ● | designing and completing clinical trials of our product candidates that will demonstrate their safe and effective use to treat the targeted disease or other medical condition; | |
| ● | sourcing clinical and, if approved, commercial supplies of key components required for the manufacture of our product candidates; | |
| ● | developing formulations of our cells that reduce or eliminate dose preparation or other complexities of handling and administration of our product candidates at the point of care; | |
| ● | identifying, developing and validating delivery systems and methods for successful surgical transplantation of our cells; | |
| ● | obtaining regulatory approval, as the regulatory framework for approval of potential allogeneic cell therapies are evolving; | |
| ● | establishing sales, marketing, and compliance capabilities upon obtaining any regulatory approval to gain acceptance of a novel therapy; | |
| ● | obtaining sufficient product coverage and reimbursement from third-party payors such as government healthcare administration authorities and private healthcare insurers for any approved product to enable the product to compete in the marketplace and become commercially profitable; and | |
| ● | obtaining and maintaining intellectual property protection for our product candidates, the operations used to manufacture them and the methods for using them in order to prevent third parties from making, using, selling, offering to sell or importing our product candidates or otherwise exploiting our cell manufacturing processes. |
If we are not successful in addressing key challenges in development and commercialization of our cell therapy product candidates, or if our product candidates and technologies do not prove to be safe or effective for the indications for which they are being developed, our business prospects and revenue opportunities will be materially limited.
We will continue to spend a substantial amount of our capital on research and development, but we might not succeed in developing products that are safe and effective for their target indications or commercially viable.
Our research and development activities are costly, time consuming, and their results are uncertain. We incurred research and development expenses amounting to approximately $14.0 million and $33.9 million during the fiscal years ended December 31, 2022 and 2021, respectively, and we expect to continue to incur substantial research and development expenses. 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, such as our product candidates, are very expensive and take years to complete. Only a small percentage of therapeutic product candidates that enter the development process ever receive marketing approval. Even with substantial spending on research and development of our product candidates, they might not prove to be safe or efficacious in the human medical applications for which they are being developed, or they may prove too expensive to manufacture or otherwise fail to gain sufficient market acceptance to be commercially viable.
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We will need to obtain substantial additional funding to complete the development and seek regulatory approval of our product candidates and to commercialize products approved for marketing, if any. If we are unable to obtain adequate capital when needed, we may delay, reduce, limit the pace of, suspend or discontinue our product and technology development programs or other operations, which could significantly harm our business and prospects and cause the market price of our common shares to decline.
At December 31, 2022, we had $57.9 million of cash, cash equivalents and marketable securities. We believe that our cash, cash equivalents and marketable securities as of December 31, 2022 will be sufficient to fund our planned operations for at least the next 12 months after the issuance of this report; however, these resources will not be sufficient to fund our product candidates through regulatory approval, and we will need to raise substantial additional capital to complete the development and seek regulatory approval of our product candidates and to commercialize products approved for marketing, if any. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our planned operations.
Until such time as we are able to generate sufficient revenues from product sales, royalties or license fees, if ever, we expect to fund our operations through equity offerings, debt financings or other third-party capital sources, including potentially new grants from governmental entities or strategic alliances, collaborations, licenses or other similar arrangements. However, additional capital may not be available to us when needed, on favorable terms, or at all, and any additional capital raised may not be sufficient to enable us to complete development or obtain regulatory approval of our product candidates or commercialize approved products, if any. Our past success in raising capital through equity offerings, strategic collaborations and grants from governmental entities should not provide any assurance that we will be successful in raising additional capital through any of those means when needed, or at all. We expect our ability to raise additional capital will depend not only on progress we and our collaborators make in developing our technologies and product candidates, but also on factors outside of our control that affect access to capital and conditions in the capital markets. A low trading volume, share price and market capitalization together with limited revenue, net losses, and limited amount of unissued authorized common shares may make it difficult and expensive for us to raise additional capital through equity or debt financings. Our ability to obtain additional funds and the amount and type of financing available to us may be adversely impacted by unstable and unfavorable market conditions. An economic downturn, recession or recessionary concerns, delay or failure of the U.S. government to raise the federal debt ceiling, increased inflation, rising interest rates, public health emergencies such as the COVID-19 pandemic, geopolitical conflicts including the war in Ukraine, terrorist attacks, global supply chain disruptions. natural or environmental disasters, strained relations between the U.S. and various other countries, social and political discord and unrest in the U.S. and various other countries can be expected to negatively impact financial markets. Volatility and deterioration in the financial markets and rising interest rates may make equity or debt financings more difficult, more costly or more dilutive and may increase competition for, or limit the availability of, funding from other third-party sources such as from strategic collaborations and grants from governmental and other entities. Our ability to obtain additional funds and the amount, type and terms of any potential financing may also be adversely affected by the performance of other companies perceived as comparable to us. For example, development setbacks or failures in cell therapies being developed by third parties could have a negative effect on potential investor or strategic collaborator sentiment for our technologies and product candidates.
If we are unable to raise capital when needed or on attractive terms, we may be forced to significantly delay, reduce, limit the pace of, suspend or discontinue some or all aspects of our product and technology development programs or other operations, fail to meet obligations under our in-license agreements and relinquish important rights, and forego opportunities to expand our pipeline, in which case, our ability to achieve our operational goals could be materially and adversely affected. In addition, if we do not have adequate capital, we may seek strategic alliances for research and development programs at an earlier stage than we would otherwise desire or on terms less favorable than might otherwise be available, or relinquish or license on unfavorable terms, our rights to technologies or future product candidates that we otherwise would seek to develop or commercialize ourselves, which could have a material adverse effect on our business and prospects.
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Our forecast of the period of time through which our financial resources will support our planned operations is based on a number of assumptions that may prove to be wrong or require adjustment as a result of business decisions, the risks, uncertainties other factors discussed elsewhere in this Risk Factors section or factors not presently known or material to us, and we may use our available financial resources sooner than we currently expect. Our future funding requirements will depend on many factors, including:
| ● | scope, progress and results of our ongoing and planned preclinical studies, clinical trials, and nonclinical activities for our product candidates; | |
| ● | unanticipated serious safety concerns related to the use of our product candidates; | |
| ● | timing of licensing payments we may be required to make based on the development of our product candidates; | |
| ● | the number, and development requirements of product candidates that we may pursue; | |
| ● | the timing and outcome of regulatory review of our product candidates; | |
| ● | changes in laws or regulations applicable to our product candidates, including but not limited to clinical trial and manufacturing requirements for approval; | |
| ● | our decisions to initiate additional clinical trials, not to initiate any clinical trial or to terminate an existing clinical trial; | |
| ● | the cost of obtaining and the availability of materials, equipment and devices that are necessary for the production or administration of our product candidates; | |
| ● | whether we decide to enter into a new third-party collaborations for development or commercialization of our product candidates and the terms of any such collaboration; | |
| ● | the cost and timing of establishing and validating new manufacturing processes or facilities for our product candidates and any approved products; | |
| ● | additions or departures of key management or scientific personnel. |
If we cannot conduct our planned operations or otherwise capitalize on business opportunities due to a lack of capital, our business, financial condition, and results of operations could be adversely affected and the market price of our common shares may decline.
Raising additional capital may cause dilution to our existing shareholders, restrict our operations, or require us to relinquish rights to or dilute our economic interest in our product candidates or technology on terms unfavorable to us.
We may seek additional capital through a variety of means, including equity offerings, debt financings or other third-party funding, including grants or new strategic alliances and licensing or collaborations. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a shareholder. 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 up-front payments or milestone payments pursuant to strategic collaborations with third parties, we have to relinquish valuable rights to our product candidates and technology or grant licenses on terms that are not favorable to us. 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. See, for example, the terms of our agreement with Roche to develop and commercialize OpRegen. Grants from third parties may involve covenants that restrict our operations, require us to relinquish valuable rights in our products, technology and other intellectual property and may be dilutive to our economic interest in products and technologies we develop with such funding. For example, as discussed in Note 14 (Commitments and Contingencies) to our consolidated financial statements included in this report, pursuant to the terms of grants received by Cell Cure from the Israeli government, there are limitations on our ability to manufacture products and transfer or license technologies outside of Israel and considerable contingent financial obligations to the IIA with respect to products, technologies and intellectual property developed with the support of IIA grant funding, which includes the OpRegen program, and, as discussed below in this Risk Factors section, pursuant to the terms of a grant we received from the CIRM in support of clinical development of OPC1, we have royalty payment obligations to CIRM based on net sales of products developed with the support of the CIRM funding, if any.
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Our ability to raise capital through equity or convertible debt financings may be limited by the amount of our authorized and unissued common shares and applicable rules of the SEC and NYSE American.
Our ability to raise capital through the issuance and sale of our common shares or securities exercisable for or convertible into our common shares is limited by the number of common shares we are authorized to issue that are not issued and outstanding or reserved for future issuance. We are currently authorized to issue up to 250,000,000 common shares and, as of December 31, 2022, 170,093,114 common shares were issued and outstanding and 19,112,202 shares are reserved for issuance upon exercise of outstanding stock options or upon the vesting and settlement of outstanding restricted stock units or for future equity awards under our equity incentive plan, which means only 60,794,684 authorized common shares were unreserved and available for issuance. Our ability to raise capital through the sale of equity securities may also be limited by various rules and regulations, including rules of the SEC, the NYSE American securities exchange or any other securities exchange on which our common shares are listed, which place limits on the amount of securities that we may sell in certain circumstances or require shareholder approval to sell securities in excess of certain amounts. We may have to forego opportunities to raise capital on favorable terms if we do not have sufficient authorized and unissued common shares or are otherwise limited by applicable rules and regulations.
Obtaining shareholder approval may be a costly and time-consuming process, and seeking shareholder approval could delay our ability to secure otherwise available capital, or cause us to miss such opportunities entirely, which may harm our business and prospects, and there is no guarantee our shareholders ultimately would approve a proposed increase in our authorized common shares. Any increase in the number of our authorized common shares would require approval of a majority of our outstanding common shares entitled to vote. We could face difficulties in soliciting a sufficient number of shareholder proxies and may have to adjourn or postpone a shareholder meeting, which would further increase the time and expense of obtaining shareholder approval. If our shareholders do not approve a proposed increase in our authorized common shares or a proposed offering and sale involving our equity securities, our ability to raise additional capital may be materially and adversely impacted, as well as our ability to pursue business opportunities where our common shares may be used as consideration, such as strategic transactions to expand our product pipeline, and to retain and recruit key personnel and other employees.
Failure by the U.S. government to raise the federal debt ceiling could materially and adversely affect our financial condition.
As of December 31, 2022, we had $46.1 million in marketable debt securities, all of which were U.S. Treasury securities. U.S. Treasury securities historically have been highly liquid and carried relatively low risk. However, in January 2023, the U.S. reached its debt ceiling, requiring the U.S. Treasury to take extraordinary measures to avoid default. The U.S. Treasury expects to exhaust these measures by early June 2023, and if U.S. lawmakers do not pass legislation to raise the federal debt ceiling by such time, it is possible that the U.S. could default on its debt obligations. Uncertainty surrounding the trading market for U.S. government securities or impairment of the U.S. government’s ability to satisfy its obligations under its treasury securities may negatively impact the liquidity and valuation of our investments in U.S. treasury securities.
We are dependent on our third-party collaboration with Roche to develop and commercialize OpRegen. If Roche is not successful in developing and commercializing OpRegen and/or Roche terminates the collaboration, we will lose a significant source of potential revenue.
We currently have a collaboration and license agreement with Roche, pursuant to which we license to Roche rights to develop and commercialize our retinal pigment epithelium cell therapies, including OpRegen (the “Licensed Products”), for the treatment of ocular disorders, including age-related macular degeneration with geographic atrophy. Roche is obligated to pay us milestone payments upon the achievement of specified developmental, regulatory and commercialization milestones. In addition, Roche is obligated to pay us royalties upon sales of the Licensed Products, if any. All regulatory and commercial milestone payments and royalty payments are subject to the existence of certain intellectual property rights that cover OpRegen at the time such payments would otherwise become due, and the royalties on net sales of OpRegen are subject to financial offsets based on the existence of competing products.
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We are expecting Roche to develop and commercialize the Licensed Products, and if Roche is not able to develop and commercialize the Licensed Products, determines not to continue to pursue development and commercialization of the Licensed Products, or determines to terminate the collaboration at any time in its sole discretion, we will not receive any future milestone or royalty payments under the agreement which would harm our business, business prospects, financial condition and results of operations.
Roche may determine not to pursue development and commercialization and/or to terminate the collaboration, in its sole discretion, for many reasons, including:
| ● | delays in development, manufacture or clinical supply of OpRegen; | |
| ● | Roche may believe that data generated in clinical trials for OpRegen may be negative, inconclusive, or do not otherwise demonstrate adequate efficacy or clinical benefit to warrant further development or commercialization; | |
| ● | Roche may conclude that the commercial landscape in GA secondary to AMD has significantly changed with the FDA approval of Apellis Pharmaceuticals, Inc.’s Syfovre® (pegcetacoplan injection) and FDA acceptance of Iveric Bio, Inc.’s new drug application for Zimura® (avacincaptad pegol); | |
| ● | Roche may not dedicate the resources necessary to carry OpRegen through clinical development, regulatory approval, or commercialization; | |
| ● | Roche may conclude that the commercial potential of OpRegen does not meet its internal thresholds or yield a timely return on its investment in OpRegen; | |
| ● | Roche may choose not to develop and commercialize OpRegen in certain, or any, markets or for one or more indications, if at all; | |
| ● | Roche may change the focus of its development or commercialization efforts or prioritize other programs more highly and, accordingly, reduce the efforts and resources allocated to OpRegen; | |
| ● | Roche may be unable to obtain regulatory clearances or approvals to continue clinical development or commercialization of OpRegen in a timely manner, or at all; | |
| ● | the failure to develop a formulation and/or manufacturing process for OpRegen that Roche believes is commercially viable in a timely manner, or at all; or | |
| ● | the loss or impairment of intellectual property rights related to OpRegen. |
If Roche terminates the collaboration:
| ● | we would no longer have the right to receive any milestone payments or royalties thereunder; | |
| ● | further development of OpRegen, if any, would be significantly delayed or terminated; | |
| ● | we would bear all risks and costs related to any further clinical development, manufacturing, regulatory approval and commercialization OpRegen, if any; |
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| ● | we might determine that the commercial potential of OpRegen does not warrant further development of OpRegen; | |
| ● | we would need to raise additional capital if we were to choose to pursue OpRegen development on our own, or we would need to establish alternative collaborations with third parties, which might not be possible in a timely manner, or at all; and | |
| ● | if we were to choose to pursue OpRegen development independently, we would need to work collaboratively with Roche to transfer the OpRegen program back to us, and such a transfer might take significant amounts of time, would be resource intensive and costly, and might not be feasible. |
Any loss or termination of rights under the collaboration will cause us to lose a significant source of potential revenue and could significantly delay or result in the discontinuation of development of OpRegen or significantly diminish the commercial potential of OpRegen, which would have a material and adverse effect on our company, financial condition and results of operations and could cause the market price of our common shares to decline.
We may expend our limited resources to pursue particular product candidates and fail to capitalize on other product candidates that may be more profitable or for which there is a greater likelihood of success.
We have multiple cell therapy programs in development and limited resources. 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 clinical or commercial potential or target market for a particular product candidate, we may focus our resources on product candidates that do not demonstrate successful clinical results or commercial viability at the expense of other programs that may have had greater success, or 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.
If we fail to meet our obligations under our in-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. Our license agreements are discussed in more detail under “Licensed Technology and Product Development Agreements” in “Part I. Business,” above.
We may acquire or acquire rights to new technologies, product candidates and other assets or businesses, which could fail to result in a commercial product or net sales, divert our management’s attention, result in additional dilution to our shareholders or otherwise disrupt our business and adversely affect our results of operations.
We evaluate and consider strategic opportunities on an ongoing basis that we believe could complement or expand our portfolio, enhance our technical capabilities or otherwise offer growth opportunities. We may in the future acquire or acquire rights to develop and commercialize new technologies, product candidates and other assets or businesses or pursue joint ventures or investments in complementary businesses. However, we may not be able to successfully complete any in-license, acquisition or other strategic transaction we choose to pursue, and we may not successfully integrate any acquired or licensed technology, development program or business in a cost-effective and non-disruptive manner. The pursuit of these potential transactions may divert the attention of management and cause us to incur significant costs and expenses in identifying, investigating and pursuing suitable opportunities and transactions, even if we do not complete the transaction. We may not be able to identify desirable targets or be successful in entering into an agreement with any particular target. Furthermore, the anticipated benefits of any strategic transaction may not materialize.
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In addition, we may not be able to successfully integrate any acquired personnel, operations and technologies, or effectively manage the combined business following an acquisition. Acquisitions could also result in dilutive issuances of equity securities, the use of our available cash, or the incurrence of debt, which could harm our operating results. We also face risk of shareholder lawsuits in connection with acquisitions that can divert management’s focus from operating our business and result in significant legal and other expenses, which could harm our operating results and financial condition. For example, we recently settled a putative shareholder class action lawsuit relating to our acquisition of Asterias after more than three years of litigation. See Note 14 (Commitments and Contingencies) to our consolidated financial statements included in this report. In addition, if an acquired technology, product candidate or other asset or business fails to meet our expectations, our business, financial condition and results of operations may be negatively affected. Additional risks we may face in connection with acquisitions include:
| ● | diversion of management time and focus from operating our business to addressing acquisition and integration challenges; | |
| ● | integration of cGMP manufacturing operations from an acquired business or company; | |
| ● | retention of key employees from an acquired business or company; | |
| ● | changes in relationships with other collaborators as a result of new program or product acquisitions or strategic positioning resulting from the acquisition; | |
| ● | the need to implement or improve controls, procedures, and policies at the acquired business or company; | |
| ● | financial reporting, revenue recognition or other financial or control deficiencies of an acquired company that we don’t adequately address and that cause our reported results to be incorrect; | |
| ● | liability for activities of an acquired company before the acquisition, including intellectual property infringement claims, misappropriation or other violation, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities; | |
| ● | unanticipated write-offs or charges; and | |
| ● | litigation or other claims in connection with an acquired company, including claims from terminated employees, vendors, former shareholders or other third parties. |
Our failure to address these risks or other problems encountered in connection with acquisitions and investments could cause us to fail to realize the anticipated benefits of these acquisitions or investments, cause us to incur unanticipated liabilities, and harm our business generally.
All of our manufacturing operations currently are conducted at our facility in Jerusalem, Israel. Accordingly, political, economic and military conditions in Israel could directly affect our business. Any event or condition that significantly disrupts our ordinary course of operations at our Jerusalem facility could harm our business and materially and adversely affect our financial condition and operating results.
We or our collaborators, suppliers, CROs, other service providers, or other third parties on which we rely may experience interruptions to our operations, including the conduct of our research and development programs, clinical trials, and manufacturing operations, due to natural disasters, public health emergencies, such as the COVID-19 pandemic, geopolitical conflicts, political and economic instability, acts of terrorism, or hardware, software, telecommunication or electrical failures, which could significantly disrupt or harm our business.
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Currently, all of our cGMP manufacturing processes, including cell banking and product manufacturing for our cell therapy product candidates, are conducted by our subsidiary, Cell Cure, at its facility in Jerusalem, Israel, and more than two-thirds of our employees are Cell Cure employees who are based in the same facility. Accordingly, political, economic and military conditions in Israel could directly affect our business. In addition, our operations are vulnerable to significant disruption if a natural disaster, public health emergency, terrorist attack, act of war, power outage or any other sudden, unforeseen and severe event or condition damages, destroys or otherwise prevents us from using, or disrupts normal operations at, this facility. For example, a natural disaster, explosion, fire or prolonged power outage could result in damage to or destruction of materials and equipment that are critical for our research and manufacturing operations, including our cell banks, or otherwise prevent us from conducting product testing or manufacturing sufficient clinical supplies, which would delay the advancement of our programs and materially harm our business, operating results, prospects, or financial condition. Our cell therapy product candidates are manufactured by starting with cells which are stored in the form of a master cell bank. While we have taken precautions to safeguard our cell banks from catastrophic events and we take precautions when transporting our cell banks, it is possible that we could lose one or more master cell banks and have our manufacturing severely impacted by the need to replace a cell bank. The disaster recovery and business continuity plans we currently have in place are limited and are unlikely to prove adequate in the event of a serious disaster or similar event. Any natural or manmade disaster affecting our Cell Cure facility or employees could materially harm our business.
Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners, or a significant downturn in the economic or financial condition of Israel, could adversely affect our operations. Ongoing and revived hostilities or other Israeli political or economic factors could harm our operations, product candidate development and results of operations. Although Israel has entered into various agreements with Egypt, Jordan, the Palestinian Authority and with various states in the Persian Gulf, there has been a continuous unrest and terrorist activity with varying levels of severity. In addition, Israel faces threats from more distant neighbors, in particular, Iran. Our insurance policies do not cover us for the damages incurred in connection with these conflicts or for any resulting disruption in our operations. The Israeli government, as a matter of law, provides coverage for the reinstatement value of direct damages that are caused by terrorist attacks or acts of war; however, the government may cease providing such coverage or the coverage might not be enough to cover potential damages. In the event that hostilities disrupt the ongoing operation of our Jerusalem facility, our operations may be materially adversely affected.
Cell Cure is an Israeli company. Several countries, principally in the Middle East, still restrict doing business with Israel and Israeli companies, and additional countries may impose restrictions on doing business with Israel and Israeli companies, whether as a result of hostilities in the region or otherwise. In addition, there have been increased efforts by activists to cause companies, research institutions and consumers to boycott Israeli goods and cooperation with Israeli-related entities based on Israeli government policies. Such actions, particularly if they become more widespread, may adversely impact our ability to obtain supplies necessary to our manufacturing operations, cooperate with research institutions and collaborate with other third parties. Any hostilities involving Israel, any interruption or curtailment of trade or scientific cooperation between Israel and its present partners, or a significant downturn in the economic or financial condition of Israel could adversely affect our business, financial condition and results of operations. We may also be targeted by cyber terrorists specifically because Cell Cure is an Israeli-related company.
Israeli citizens are obligated to perform several days, and in some cases more, of annual military reserve duty each year until they reach the age of 40 (or older, for reservists who are military officers or who have certain occupations) and, in the event of a military conflict, may be called to active duty. In response to increases in terrorist activity, there have been periods of significant call-ups of military reservists. It is possible that there will be military reserve duty call-ups in the future. Our operations could be disrupted by such call-ups, which may include the call-up of Cell Cure management and other employees. Such disruption could materially adversely affect our business, prospects, financial condition and results of operations.
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Cell Cure has received Israeli government grants for certain of its research and development activities. The terms of these grants may require us 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, we 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, including grants under the Innovation Law. 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. See “Item 1. Business—Grants from Government Entities,” above. For example, the OpRegen program has been supported in part by the IIA through a series of separate research grants, beginning in 2007. As a result, and subject to the requirements of the Innovation Law, we are obligated to pay to the IIA approximately 24.3% of the upfront, milestone, and royalty payments we may receive under the Roche Agreement, up to an aggregate cap on all payments to IIA, such cap growing over time via interest accrual until paid in full, which as of December 31, 2022, currently stands at approximately $91.2 million.
The restrictions under the Innovation Law may impair our ability to enter into any future agreements which involve IIA-funded products or know-how without the approval of IIA, or limit the economic benefit that we might derive under such agreements. 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 significantly 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.
We have relied on grant funding from CIRM to support clinical development of OPC1 and we may not be able to obtain additional CIRM funding, which could negatively impact our operating results and financial condition. In addition, our profits from the sale of products resulting from CIRM-funded development, if any, will be reduced by amounts that we are required to pay CIRM.
The clinical development of OPC1 has been supported by $14.3 million of funding as of the date of this report from CIRM, a state agency established to fund stem cell research and development of new stem cell-based treatments. We intend to apply for additional CIRM grants; however, we cannot provide any assurance that CIRM will have access to additional funds for grants or that any such funding will be awarded to us. If we are unable to obtain another CIRM grant or if the grant funding is insufficient, we may need to raise funds through other mechanisms to continue clinical development of OPC1, which could have a higher cost of capital, cause dilution to our shareholders, restrict our operations or require us to relinquish rights on unfavorable terms. See “Item 1. Business—Grants from Government Entities,” above.
In addition, the terms of our grant award from CIRM require, and we expect the terms of any future grant from CIRM will require, royalty payments to CIRM based on sales of products developed with CIRM funding, if any, which will reduce our profits on sales of such products.
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 94% owned subsidiary located in Jerusalem, Israel. Currently, all of our cGMP manufacturing processes, including cell banking and product manufacturing for our cell therapy product candidates, are conducted by Cell Cure at its Jerusalem facility. 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:
| ● | difficulty in staffing and managing foreign operations; | |
| ● | 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; | |
| ● | financial risks, such as longer payment cycles and exposure to foreign currency exchange rate fluctuations;
| |
| ● | subject to tax on Global Intangible Low Tax Income earned by foreign subsidiaries; | |
| ● | political and economic instability, including wars, terrorism, and political unrest, outbreak of disease, boycotts, curtailment of trade and other business restrictions; | |
| ● | 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 | |
| ● | 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. |
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, particularly 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.
The COVID-19 pandemic negatively affected, and it and any other similar public health crisis may in the future have a material adverse effect on, our operations, including the conduct of our clinical trials, as well as the operations of third parties on which we rely.
In March 2020, the World Health Organization declared COVID-19 a global pandemic and the United States declared a national emergency with respect to COVID-19. In response to the COVID-19 pandemic, a number of governmental orders and other public health guidance measures were implemented across much of the United States and Israel, including in the locations of our office and manufacturing facility, clinical trial sites and third parties on which we rely, including quarantines, prohibitions on non-essential operations and gatherings at physical locations, and travel restrictions. The COVID-19 pandemic and actions taken to reduce its spread disrupted our normal course of business operations, including with the implementation of an employee work-from-home policy and travel restrictions, and negatively affected clinical trials of our product candidates. In particular, patient enrollment was delayed in our OpRegen Phase 1/2a clinical trial and the VAC2 Phase 1 clinical trial conducted by Cancer Research UK. Clinical trial sites paused enrollment to focus on, and direct resources to, the COVID-19 pandemic, to adhere to national or local guidelines restricting non-essential operations and gatherings, or in the interest of patient safety. Additionally, some enrolled patients in those trials decided not to participate in follow-up visits on schedule or at all.
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Significant uncertainty remains relating to the potential impact of the COVID-19 pandemic, or possible endemic, on the global economy and on our business, operating results and financial condition. As a result of the COVID-19 pandemic, or potentially similar public health crises in the future, and related governmental orders and other public health guidance measures, we may experience business disruptions that could materially and adversely impact our product development programs, business prospects, operating results and financial condition. Potential disruptions might include but are not limited to:
| ● | delays or difficulties in clinical trial site initiation, including difficulties in recruiting clinical site investigators and staff, | |
| ● | delays or difficulties in enrolling patients or conducting follow-up visits with patients in our clinical trials, particularly patients who may be at higher risk of complications from COVID-19; | |
| ● | increased rates of patients withdrawing from our clinical trials following enrollment as a result of contracting COVID-19 or other health conditions or being forced to quarantine; | |
| ● | diversion of healthcare resources away from the conduct of clinical trials, including at hospitals or other facilities serving as our clinical trial sites; | |
| ● | interruption of key clinical trial activities, such as clinical trial site monitoring, due to limitations on travel; | |
| ● | limitations on employee or other resources that would otherwise be focused on the conduct of our clinical trials and preclinical work, including because of sickness of employees or their families, the desire of employees to avoid travel or contact with large groups of people, an increased reliance on working from home, school closures or mass transit disruptions; | |
| ● | manufacturing delays and difficulties for us and our suppliers of raw materials caused by business closures, operational restrictions or labor shortages; | |
| ● | delays in clinical trial 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; | |
| ● | 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; | |
| ● | interruption or delays in the operations of the FDA or other regulatory authorities, including with respect to their manufacturing or clinical trial site inspections, which may impact their ability to timely review and process any submissions we or our collaborators file; | |
| ● | risk that participants enrolled in our clinical trials will contract COVID-19 or other health conditions 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 | |
| ● | refusal of the FDA to accept data from clinical trials in affected geographies. |
If patient enrollment or follow-up in our clinical trials is delayed for an extended period of time due to the COVID-19 pandemic or another public health crisis, our clinical trials could be significantly delayed or otherwise adversely affected. Our inability to enroll or follow a sufficient number of patients in our clinical trials could require us to suspend or abandon one or more clinical trials altogether.
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 suppliers upon which we rely, or the availability or cost of materials necessary to produce our product candidates, 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.
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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.
Moreover, many of our office-based employees continue to work remotely at least part of the time, which may negatively impact productivity and exacerbate certain risks to our business, including cybersecurity attacks and data security incidents due to an increase in the number of points of potential attack.
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, limit our business development activities, or otherwise adversely impact our business, operating results and financial condition or those of third parties on which we rely will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the pandemic, adverse impacts of new coronavirus variants, new information that will emerge concerning the severity of COVID-19, and the actions to contain COVID-19 or treat its impact, among others.
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.
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. 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 would likely 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 as we expand our business, including our clinical development 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.
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 Biden administration and Congress have proposed various U.S. federal tax law changes, which if enacted could have a material impact on our business, cash flow, financial condition or results of operations. In addition, it is uncertain if and to what extent various states will conform to the federal tax laws. Future tax 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.
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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, 2022, we had substantial net operating loss (“NOL”) carryforwards for U.S. federal and state tax purposes and other tax attributes to offset future taxable income. However, our federal NOL carryforwards and other tax attributes may not be available to offset future taxable income because of restrictions under U.S. tax law and similar limitations that may apply under state tax laws. A portion of our federal and state NOL carryforwards will begin to expire, if not utilized, in varying amounts between 2027 and 2042. Our federal research and development tax credit carryforwards expire in varying amounts between 2022 and 2042, the California research and development tax credit carryforwards have no expiration date. See Note 13 (Income Taxes) to our consolidated financial statements included in this report for additional information. NOL carryforwards and research and development and other tax credits that expire unused will be unavailable to offset future income tax liabilities. Under federal income tax law, federal NOL carryforwards generated in tax years beginning after December 31, 2017, may be carried forward indefinitely, but the deductibility of such NOL carryforwards 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 have experienced ownership changes in the past and 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. As a result, our ability to use our pre-change NOL carryforwards and tax credits to offset post-change taxable income, if any, could be subject to significant limitations. Similar provisions of state tax law may also apply. In addition, at the state level, there may be periods during which the use of NOL 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 NOL carryforwards and certain tax credits in tax years beginning after 2019 and before 2022. As a result of limitations on our ability to use our NOL carryforwards and tax credits, we may be unable to gain the benefit of a material portion of our NOL carryforwards and tax credits, which could harm our future operating results by effectively increasing our future income tax obligations.
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; however, tax authorities in any country may disagree with our transfer pricing policies and procedures. 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.
Because a portion of our expenses are incurred in currencies other than the U.S. Dollar, our results of operations may be harmed by currency fluctuations.
Our reporting and functional currency is the United States Dollar, but a material portion of our research and development and other operating expenses are incurred in Israeli New Shekels through our subsidiary Cell Cure. As a result, we are exposed to some currency fluctuation risks. Fluctuation in the exchange rate of the foreign currency has an influence on and may adversely affect our comprehensive loss and cash flows.
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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:
| ● | the federal Anti-Kickback Statute, which prohibits, among other things, persons and entities 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; | |
| ● | 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; | |
| ● | 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; | |
| ● | HIPAA, as amended by 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; | |
| ● | The Physician Payments Sunshine Act which requires manufacturers of drugs, devices, biologics, and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to the CMS, information related to payments and other transfers of value to physicians (defined to include doctors, dentists, optometrists, podiatrists, and chiropractors), certain other healthcare professionals (such as physician assistants and nurse practitioners), and teaching hospitals, and ownership and investment interests held by physicians and their immediate family members and applicable group purchasing organizations; and | |
| ● | 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. |
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 healthcare reform legislation has strengthened these laws.
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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 healthcare 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 product candidates.
Our investigational cell therapies cannot be marketed or sold until the FDA and corresponding foreign regulatory authorities approve the products for the human medical applications for which they are being developed. In addition, the regulatory approval process for novel product candidates such as ours can be more complex and consequently more expensive and take longer than for other, better known or extensively studied pharmaceutical or other product candidates. The need to obtain regulatory approval to market a new product means that:
| ● | 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. | |
| ● | 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. | |
| ● | Data obtained from preclinical and clinical studies is susceptible to varying interpretations and regulatory changes that could delay, limit, or prevent regulatory agency approvals. | |
| ● | 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. | |
| ● | A product that is approved may be subject to restrictions on use. | |
| ● | The FDA can recall or withdraw approval of a product, if it deems necessary. | |
| ● | We will face similar regulatory issues in foreign countries. |
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 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 SCRO Committee. 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 Committee. A SCRO Committee 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.
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Some of our product candidates, may be considered combination products by the FDA and other regulatory authorities, which could increase the complexity, cost and timeline for their development and regulatory approval.
To the extent our product candidates meet the FDA’s or other regulatory authority’s definition of a combination product, the regulatory approval requirements can be more complex because in addition to the individual regulatory requirements for each component, e.g., a biologic and a medical device, additional combination product regulatory requirements may apply. The cost and timeline for development of any of our cell therapy product candidates determined to be a combination product may be substantially greater than that of other product candidates.
We expect that the commercial opportunity for some of our products may depend on our ability, or that of a commercial collaborator, to obtain and maintain reimbursement and continued coverage from various payors, including government agencies 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 Healthcare 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.
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Legislation and legislative and regulatory proposals intended to contain health care costs may adversely affect our business.
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. As an example, in August 2022, Congress passed the Inflation Reduction Act of 2022, which includes prescription drug provisions that have significant implications for the pharmaceutical industry and Medicare beneficiaries, including allowing the federal government to negotiate a maximum fair price for certain high-priced single source Medicare drugs, imposing penalties and excise tax for manufacturers that fail to comply with the drug price negotiation requirements, requiring inflation rebates for all Medicare Part B and Part D drugs, with limited exceptions, if their drug prices increase faster than inflation, and redesigning Medicare Part D to reduce out-of-pocket prescription drug costs for beneficiaries, among other changes. Further, the Biden administration released an additional executive order on October 14, 2022, the U.S. Department of Health & Human Services to submit a report within 90 days on how the Center for Medicare and Medicaid Innovation can be further leveraged to test new models for lowering drug costs for Medicare and Medicaid beneficiaries. It is unclear whether this executive order or similar policy initiatives will be implemented in the future. The impact of these legislative, executive, and administrative actions and any future healthcare measures and agency rules implemented on the pharmaceutical industry as a whole is unclear. The implementation of cost containment measures, including the prescription drug provisions under the Inflation Reduction Act, as well as other healthcare reforms may prevent us from being able to generate revenue, attain profitability, or commercialize our product candidates if approved.
Disruptions at the FDA and other government agencies caused by funding shortages or other events or conditions outside of their control 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, as a result of the COVID-19 pandemic, the FDA’s inspectional activities were interrupted and restarted on a risk-based basis, which had the effect of delaying review and potential approval of product candidate marketing applications. In addition, 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 various activities.
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:
| ● | created the branded prescription pharmaceutical manufacturers and importers annual fee; | |
| ● | 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; | |
| ● | 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; | |
| ● | 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; | |
| ● | expanded the entities eligible for discounts under the Public Health program; | |
| ● | 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; | |
| ● | 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 | |
| ● | created a licensure framework for follow on biologic products. |
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 for not complying with the ACA’s individual mandate to carry health insurance, and eliminating the implementation of certain ACA-mandated fees. In June 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, in January 2021, President Biden issued an executive order that, among other things, 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 2031, with the exception of a temporary suspension from May 1, 2020 through March 31, 2022, unless additional Congressional action is taken. Under current legislation, the actual reduction in Medicare payments will vary from 1% in 2022 to up to 3% in the final fiscal year of this sequester. 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. Additionally, Congress is considering additional health reform measures.
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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 presidential executive orders, 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, in 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 concurrently released a final rule and guidance in September 2020, providing pathways for states to build and submit importation plans for drugs from Canada. Further, in November 2020, the U.S. Department of Health & Human Services (“HHS”) 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 until 2032 by the Inflation Reduction Act of 2022. 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 has been delayed until 2032 by the Inflation Reduction Act of 2022. 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. As a result of litigation challenging the Most Favored Nation model, in December 2021, CMS published a final rule that rescinds the Most Favored Nation model interim final rule. Further, in July 2021, the Biden administration released an executive order that included multiple provisions aimed at prescription drugs. In response to President Biden’s executive order, in September 2021, the HHS released a Comprehensive Plan for Addressing High Drug Prices that outlines principles for drug pricing reform. The plan sets out a variety of potential legislative policies that Congress could pursue as well as potential administrative actions HHS can take to advance these principles. No legislation or administrative actions have been finalized to implement these principles. 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 in response to the COVID-19 pandemic.
If we fail to comply with the extensive legal and regulatory requirements affecting the healthcare industry, we could face increased costs, penalties and 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, future advertising and promotion, product distribution, adverse event reporting and product risk management. Our current and future interactions in the U.S. or abroad with physicians and other healthcare providers that may prescribe or purchase our products once commercialized 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 healthcare companies. Healthcare companies are facing heightened scrutiny of their relationships with healthcare providers from anti-corruption enforcement officials. In addition, healthcare 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 healthcare 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 healthcare industry are subject to change, with possibly retroactive effect, including:
| ● | new laws, regulations or judicial decisions, or new interpretations of existing laws, regulations or decisions, related to healthcare availability, pricing or marketing practices, compliance with wage and hour laws and other employment practices, method of delivery, payment for healthcare 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; | |
| ● | 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 | |
| ● | 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. |
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 to market a product candidate, we may be subject to extensive post-approval regulatory obligations that may have a significant adverse effect on our business, results of operations, financial condition and reputation.
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.
The FDA has granted orphan drug designation to OPC1 for the treatment of acute spinal cord injuries, but there is no guarantee we will be able to maintain orphan drug designation or obtain the benefits associated with orphan drug designation, including marketing exclusivity.
We have orphan drug designation from the FDA for OPC1 for the treatment of acute spinal cord injuries. As discussed in more detail in Item 1. “Business—Government Regulation—FDA and Foreign Regulation of Therapeutic Products,” above, generally, if a biologic with orphan drug designation from the FDA subsequently receives the first marketing approval for the indication for which it has such designation, the product is entitled to seven years of marketing exclusivity in the United States. Other benefits of an orphan drug designation may include a waiver of the marketing application fee. However, the orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review or approval process.
Orphan drug designation may not effectively protect OPC1 from competition because different drugs or biologics can be approved for the same indication and only the first biologic with an orphan drug designation to receive FDA approval for the treatment of acute spinal cord injuries will receive marketing exclusivity. OPC1 may not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation. In addition, exclusive marketing rights in the United States may be lost if the FDA later determines that our request for orphan drug designation was materially defective or if we are unable to assure sufficient quantities of the commercial product to meet the needs of patients with acute spinal cord injuries.
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Risks Related to Our Clinical Development and Commercial Operations
Clinical development of new therapeutic products is a lengthy and expensive process with a high level of uncertainty as to timing and ultimate outcome.
Clinical and nonclinical development of new therapeutic products is expensive and can take many years to complete, and its outcome and timing are 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 development process. There is typically an extremely high rate of attrition from the failure of product candidates proceeding through clinical trials, and cell therapy is a relatively new field, which may heighten the risk of failure. Events that may prevent successful or timely completion of clinical development of our product candidates include, but are not limited to:
| ● | 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; | |
| ● | delays in identifying, developing or securing rights to use, and testing delivery systems or other methods for administration of our potential cell therapies; | |
| ● | 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; | |
| ● | delays in obtaining required institutional review board (“IRB”) or ethics committee (“EC”) approval at each clinical trial site; | |
| ● | failure obtaining permission from regulatory authorities to conduct a clinical trial after review of an IND or equivalent foreign application or amendment; | |
| ● | 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 COVID-19 pandemic), or failure to reach the targeted number of study participants due to competition from other clinical trials or available treatment options (some potentially newly approved and marketed), or patients dropping out of our clinical studies once enrolled; | |
| ● | failure by clinical sites or our CROs or other third parties to adhere to clinical trial requirements or report complete findings; | |
| ● | failure to perform the clinical studies in accordance with the FDA’s good clinical practices requirements or applicable foreign regulatory guidelines; | |
| ● | occurrence of serious adverse events (“SAEs”) or adverse events (“AEs”) 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; | |
| ● | negative or inconclusive results from our clinical trials or clinical trials of others for product candidates similar to ours, 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; | |
| ● | inadequate effectiveness or unacceptable side effects, possibly resulting in the FDA or other regulatory authorities denying approval of our product candidates; | |
| ● | 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 patient compliance with the clinical trial protocols; | |
| ● | inability or unwillingness of medical investigators to follow our clinical trial protocols; | |
| ● | inadequate supply or quality of clinical trial materials or other supplies necessary for the conduct of our clinical trials; | |
| ● | delayed or unfavorable FDA or other regulatory agency inspection and review of a clinical trial site or a manufacturing facility; | |
| ● | inability to use clinical trial results from foreign jurisdictions to support U.S. regulatory approval; | |
| ● | changes in regulatory requirements and guidance that require amending clinical trial protocols or conducting additional clinical or nonclinical studies; and | |
| ● | greater than anticipated cost of clinical studies of our product candidates. |
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 unforeseen events, such as previously occurred as a result of the COVID-19 pandemic as discussed elsewhere in this Risk Factors section, 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.
Delays or any inability to successfully complete clinical development and obtain regulatory approval could result in additional costs to us, impair our ability to generate revenue and harm our financial condition. 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 prospects and results of operations.
The results of preclinical studies and early 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 despite positive results in preclinical and early clinical studies, which may have a material and adverse effect on our business and financial condition.
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. Results from preclinical testing and clinical studies of our product candidates, may support continued development and we may spend significant time and resources on development of a potential product based on results of such early studies, but product candidates in later stages of development may fail to demonstrate safety and efficacy results necessary for regulatory approval or commercial viability. Many companies in our industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy, insufficient durability of efficacy or unacceptable safety issues, notwithstanding promising results in earlier trials. Most product candidates that commence clinical trials are never approved as products. A failure of one or more clinical studies can occur at any stage of development, including in a post-approval study.
In later clinical studies, our product candidates may not demonstrate the efficacy, durability of efficacy, or safety achieved in preclinical and earlier clinical studies for a variety of reasons, including:
| ● | our efforts to improve, standardize, and scale up the manufacture of our clinical product candidates, including OpRegen, OPC1, and VAC2, and any resulting changes to the product candidates, may adversely affect the safety, purity, potency or efficacy of such product candidates; | |
| ● | differences in delivery systems or other methods of transplant or administration of our cell formulations; | |
| ● | differences in trial design, including number of subjects, controls (type and number), eligibility criteria, patient populations, and endpoints; |
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| ● | advancements in the standard of care, including newly approved and/or marketed products, may affect our ability to demonstrate efficacy or achieve trial endpoints in our current or future clinical trials; and | |
| ● | variability in interpretation and analysis of study data. |
For example, based on data analyzed to date, in our Phase 1/2a open-label trial for OpRegen, OpRegen has been well tolerated and demonstrated an acceptable safety profile, with no unexpected adverse events, while having qualifiable and quantifiable therapeutic potential in patients with geographic atrophy secondary to age-related macular degeneration. However, positive data from the Phase 1/2a trial are not necessarily predictive of results that may be seen from the Phase 2a clinical trial that Roche launched in late 2022. We do not know how OpRegen will perform in that Phase 2a trial or future clinical trials.
Additional clinical trials of our product candidates, 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, will be necessary before we or our collaborators 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, or that of our collaborators, to meet the requirements to support marketing approval for our product candidates in ongoing and future clinical trials would substantially harm our business and prospects. If clinical trials of our product candidates are not successful, our business, financial condition and results of operations could be materially harmed, and the price of our common shares may decline significantly following announcement of an unsuccessful clinical trial.
Interim, topline and preliminary data from clinical trials of our product candidates that we or our collaborators publicly disclose 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 or collaborators conducting clinical trials of our product candidates may publicly disclose interim, preliminary or topline data from those 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, preliminary and topline results reported for clinical trials of our product candidates may differ from final results of the same studies, or different conclusions or considerations may qualify such results, once additional data have been received and fully evaluated. Such 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 disclosed. As a result, preliminary and topline data should be viewed with reservation 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, topline 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.
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The manufacture of our cell therapy product candidates is complex, highly regulated and subject to a multitude of risks. We have limited experience manufacturing our product candidates on a clinical scale and no experience manufacturing on a commercial scale. Any failure by us or any third party on which we may depend to manufacture our product candidates in sufficient quantities in accordance with our quality standards and regulatory requirements and at acceptable costs, may result in significant clinical development delays or impair our ability, or that of a strategic collaborator, to obtain approval for or commercialize our product candidates.
The manufacture and supply of our cell therapy product candidates involve novel processes that are generally more complex than those required for small molecule drugs and accordingly present significant challenges and are subject to multiple risks. These complex processes involve the expansion and differentiating of the pluripotent cells to obtain the desired cell product candidate. Manufacturing our product candidates requires significant expertise and capital investment, including in the development and validation of advanced manufacturing techniques and specific quality assurance and quality control procedures. As a result of the complexities involved, the cost to manufacture human cell-based biologics is generally higher than for traditional therapies or vaccines and the manufacturing process is less reliable and more difficult to reproduce. In addition, our cost of goods development is at an early stage. The actual cost to manufacture and supply our product candidates could be greater than we expect and could materially and adversely affect the commercial viability of our product candidates. Excessive manufacturing costs could make our product candidates too expensive to compete with alternative products or therapies, or might result in third-party payors declining to cover our products or setting coverage levels too low for us to earn a profit from the commercialization of one or more of our products.
We intend to manufacture all of the clinical supply of our cell therapy product candidates for ongoing and planned clinical trials. We will need to scale up our manufacturing operations, as we do not currently have the infrastructure or capability to manufacture sufficient quantities of each of our product candidates to support commercialization, if approved. Currently, as described elsewhere in this Risk Factors section, we are entirely dependent on our subsidiary Cell Cure and its manufacturing facility located in Israel for the manufacture and supply of our cell therapy product candidates. While that facility is designed and equipped to enable simultaneous cGMP processes and to produce a range of human cell therapy products for use in clinical trials, as well as at a scale suitable for commercial launch, we will need greater manufacturing capacity to support commercial development of all our product candidates. If we do not have sufficient capital to increase our internal manufacturing capabilities, we may need to rely on third-parties to manufacture and supply any products we develop and there is no assurance that we would be able to identify third parties capable of manufacturing our product candidates on acceptable terms or at all.
We are still developing optimized and reproducible manufacturing processes for clinical and commercial-scale manufacturing of our product candidates. To date, we have not scaled the manufacturing processes with respect to any of our product candidates for commercialization. None of our manufacturing processes have been validated for commercial production of our product candidates. We may face multiple challenges as we scale up our manufacturing operations and, ultimately, we may not be successful as to one or more of our product candidates. These challenges include, among others, cost overruns, potential problems with process scale-up, process reproducibility, stability and purity issues, compliance with cGMP and cGTP, lot consistency and timely availability and quality of acceptable reagents and raw materials. In addition, we are continuing to optimize our protocols for the supply and transport of our product candidates for distribution to clinical trial sites. Although we are working to develop reproducible and commercially viable manufacturing processes for our product candidates, and effective protocols for the supply and transport of our product candidates, doing so is a difficult and uncertain task. If we are unable to scale production to the level required for commercialization, we may not be able to meet the requirements for the potential commercial launch or to meet potential future demand if any product candidates are approved for commercialization, which would have an adverse effect on our business, financial condition, results of operations and growth prospects.
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The manufacturing processes for any products that we may develop and the facilities used to manufacture our product candidates are subject to FDA and foreign regulatory authority approval requirements, and we will need to meet, and any third party manufacturers we may rely on the future will need to meet, all applicable FDA and foreign regulatory authority requirements on an ongoing basis. We cannot provide assurance that the manufacturing processes that we use, or the technologies that we incorporate into these processes, will result in viable or scalable yields of our cell therapy product candidates that will be safe and effective. We may be required to identify alternative protocols, processes, raw materials, or facilities for the manufacture of any of our product candidates in compliance with applicable regulatory requirements. In addition, we may be required to increase our safety testing protocols for our product candidates. Any modifications to our manufacturing and supply protocols, processes, safety testing, materials or facilities, and any delays in, or inability to, establish acceptable manufacturing and supply operations for our product candidates could require us to incur substantial additional development costs or result in significant delays to our clinical development. If we, or any third-party manufacturer we may rely on in the future, are unable to reliably produce products to specifications acceptable to the FDA or other regulatory authorities, we may not obtain or maintain the regulatory approvals we need to commercialize our product candidates. Even if we obtain regulatory approval for any product candidates, there is no assurance that either we or any future third-party manufacturer will be able to manufacture the approved product to specifications acceptable to the FDA or other regulatory authorities, to produce it in sufficient quantities and on the requisite timelines to meet the requirements for the potential launch of the product, or to meet potential future demand. Additionally, changes in regulatory requirements may require us or our third-party manufacturers to perform additional studies or to modify protocols, processes, materials or facilities for the manufacture of our product candidates or any components thereof. Any of these challenges could delay initiation or completion of clinical trials, require bridging clinical trials or the repetition of one or more clinical trials, increase clinical trial costs, delay approval of our product candidates, impair commercialization efforts, increase our cost of goods, and have an adverse effect on our business, financial condition, results of operations and prospects.
Changes in or disruptions to our manufacturing operations could materially and adversely affect our business.
We may have to make changes to our manufacturing operations or processes at various points during development, before or after commercialization, for various reasons, such as to control costs, achieve scale, decrease processing time, increase manufacturing success rate, or for other reasons. Such changes, even seemingly minor changes, carry the risk that they will not achieve their intended objectives, and any of these changes could cause our product candidates to perform differently and affect the results of any of our then-ongoing clinical trials or future clinical trials, or the performance of the product. In certain circumstances, if we make changes to our manufacturing operations or process for a product candidate, the FDA or foreign regulatory authorities may require us to perform comparability studies and collect additional preclinical or clinical data prior to undertaking additional clinical trials or obtaining marketing approval for the product candidate, or if already on the market, prior to supplying any product produced with such modified process. For instance, if we make changes to our manufacturing process for a product candidate during the course of clinical development, regulatory authorities may require us to show the comparability of the product used in earlier clinical phases or earlier portions of a trial to the product used in later clinical phases or later portions of the trial. We may be unable to successfully generate comparability data, and even if we are able to generate and provide such data, regulatory authorities may determine that the data are insufficient to support a determination of comparability which would result in additional testing, and could result in manufacturing delays and affect our ability to timely commence or complete clinical trials of our product candidate, which could delay further development or commercialization of such product candidate and may increase our development costs substantially.
Currently, as described elsewhere in this Risk Factors section, we are entirely dependent on our subsidiary Cell Cure and its manufacturing facility located in Israel for the manufacture and supply of our cell therapy product candidates, and events or conditions that disrupt operations at that facility could materially and adversely affect our business. In 2022, we announced the opening of a new research and development facility in Carlsbad, California to support the development of current and future allogeneic cell transplant programs. Utilization of this new facility for cGMP manufacturing of our product candidates will require significant additional investment, including hiring and retaining additional experienced scientific, quality control, quality assurance, and manufacturing personnel, which may be difficult given the intense competition for qualified personnel in our industry as described elsewhere in this Risk Factors section. Even if we have sufficient capital to complete the build-out and staffing of the Carlsbad facility, we will need to conduct significant development work to transfer our manufacturing processes to enable manufacturing of any product candidate in our Carlsbad facility. Transferring manufacturing testing and processes and know-how is complex and involves review and incorporation of both documented and undocumented processes that may have evolved over time. If, in the future we were to engage a third-party manufacturer to conduct any of the cGMP manufacturing for our product candidates, or any product, we would face similar and significant challenges in transferring manufacturing processes and know-how, which may delay the manufacture of clinical trial or commercial supplies and disrupt or delay clinical development of our product candidates. In addition, transferring production to different facilities may require utilization of new or different processes to meet the specific requirements of a given facility. We may be required to demonstrate the comparability of clinical material generated at any new facility with material previously produced and used in clinical testing. Any inability to manufacture comparable material by us or any third-party manufacturer we may engage could delay the development and commercialization of our product candidates and may increase our development costs substantially.
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Our product candidates are susceptible to product loss or reduced manufacturing success rates at various points during the manufacturing process, including quality issues due to contamination, equipment damage or failure, including during shipment or storage, failure of equipment to operate as expected, improper installation or operation of equipment, operator error, damage to, variability of, or improper use of raw materials or consumables necessary for the manufacturing process, inconsistency in yields, variability in product characteristics, and difficulties in scaling the production process. Any of these issues, and even minor deviations from normal manufacturing processes, could result in reduced production yields, product defects, and other supply disruptions and delays. If any contaminants are discovered in our product candidates during its production or clinical testing this could lead to the withdrawal of our products from clinical trials. Moreover, if the FDA or comparable foreign regulatory authorities determine that we or any third-party manufacture on which we rely are not in compliance with applicable laws and regulations, including cGMPs and cGTPs, the FDA or comparable foreign regulatory authority may not approve a marketing application until the deficiencies are corrected or we replace the manufacturer in our application with a manufacturer that is in compliance, which we may not be able to do on a timely basis at a reasonable cost, or at all. If we or any third-party manufacturer on which we rely fail to comply with applicable regulatory requirements, we may ultimately be unable to manufacture our product candidates. Any such failure could be the basis for the FDA to issue a warning letter, withdraw approvals for product candidates previously granted to us, or take other regulatory or legal action, including recall or seizure of supplies of the product candidate, total or partial suspension of production, suspension of then-ongoing clinical trials, refusal to approve then-pending applications or supplemental applications, detention of product, refusal to permit the import or export of products, injunction or imposing civil and criminal penalties. The occurrence of any of these issues could result in product liability claims, delay or failure to commence or complete clinical development, obtain regulatory approval of or commercialize our product candidates.
Our manufacturing operations, and those of any third-party manufacturer on which we may rely, are also susceptible to disruption due to resource constraints, labor shortages, supply chain failures, public health emergencies such as the COVID-19 pandemic, geopolitical conflict, acts of terrorism, political or economic instability or crises, natural disasters, and other reasons. Any adverse developments affecting manufacturing operations for any of our product candidates may result in shipment delays, inventory shortages, lot failures, product withdrawals or recalls, or other supply interruptions that could negatively impact the conduct of our clinical trials or our ability to successfully commercialize any product candidates for which we may obtain regulatory approval. We may also have to take inventory write-offs and incur other charges and expenses for products that fail to meet specifications as a result of defects or storage over an extended period of time, undertake costly remediation efforts, or seek more costly manufacturing alternatives, which may not be available on a timely basis, or at all.
Regenerative Medicine Advanced Therapy (“RMAT”) designation may not lead to a faster development or regulatory review or approval process and it does not increase the likelihood that a product candidate will receive marketing approval.
We have received RMAT designation from the FDA for OPC1 for the treatment of subacute spinal cord injuries. There is no assurance that we will be able to obtain RMAT designation for any other current or future product candidates. RMAT designation does not change the FDA’s standards for product approval, and there is no assurance that such designation will result in expedited review or approval or that the approved indication will not be narrower than the indication covered by the RMAT designation. Additionally, RMAT designation can be revoked if the criteria for eligibility cease to be met as clinical data emerges.
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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 healthcare 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 healthcare 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:
| ● | the efficacy of the product as demonstrated in clinical trials and potential advantages over competing treatments; | |
| ● | the prevalence and severity of any side effects; | |
| ● | the clinical indications for which approval is granted, including any limitations or warnings contained in a product’s approved labeling; | |
| ● | the convenience and ease of administration, including compared to alternative treatments; | |
| ● | the cost of treatment, including in relation to alternative treatments; | |
| ● | the willingness of the patients and physicians to accept and use these therapies; | |
| ● | the marketing, sales and distribution support for the products; | |
| ● | the publicity concerning our products or competing products and treatments; and | |
| ● | the pricing and availability of coverage and adequate reimbursement by third-party payors and government agencies |
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 healthcare 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 prove to be significantly smaller than we estimate, our business prospects may suffer.
Our projections of addressable patient populations within any particular disease state or condition that may benefit from treatment with our product candidates are based on our beliefs and estimates. Market opportunity estimates and growth forecasts are subject to significant uncertainty and are based on assumptions 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. If any of our estimates proves to be inaccurate, the market opportunity for any of our product candidates could be significantly diminished, which would have an adverse material impact on our business.
We face significant competition, and if our competitors develop and market products that are more effective, safer, more convenient, or less expensive than our product candidates, our commercial opportunities will be negatively impacted.
The biotechnology and pharmaceutical industries, and particularly the still nascent area of cell therapies, is intensely competitive and characterized by rapid and significant innovation. Any of our product candidates that obtains regulatory approval will face substantial competition based on many different factors, including the relative safety and efficacy of our product, the relative ease of administration of our product for healthcare providers, the convenience of our product for patients, the timing and scope of regulatory approvals for our product, the cost of manufacturing our product and whether sufficient quantities can be produced to meet demand, our marketing and sales capabilities or those of our collaborators, pricing, reimbursement coverage levels, and patent positions. Competing products could present superior treatment alternatives, including by being more effective, safer or easier or more convenient to administer, or may be less expensive for third-party payors or patients or marketed and sold more effectively than any products we may develop.
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Our competitors include a variety of major pharmaceutical and biopharmaceutical companies and specialty pharmaceutical and biotechnology companies, as well as technology and therapeutics being developed at academic institutions and other public and private research institutions. Many of our competitors have greater financial and other resources, such as larger research and development staff, more experienced manufacturing organizations and facilities, and established sales and marketing organizations. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources, including intellectual property that may be necessary or useful for the development and commercialization of our product candidates, being concentrated in our competitors and becoming unavailable to us on reasonable commercial terms or at all. Third parties are commercializing, have developed, are developing or may develop product candidates, platform technologies and processes that will compete with ours. Competitive therapeutic treatments include those that have already been approved and accepted by the medical community and considered standard-of-care treatments, as well as novel treatments that are currently in preclinical or clinical development or may otherwise enter the market. For example, in February 2023, the FDA approved Apellis Pharmaceuticals, Inc.’s SYFOVRE® (pegcetacoplan injection) for the treatment of GA, and in February 2023, Iveric Bio, Inc.’s new drug application for Zimura® (avacincaptad pegol) for the treatment of GA secondary to AMD was accepted by the FDA. In addition to the foregoing, we believe that a significant number of product candidates are currently under development, which may become commercially available in the future for the treatment of indications for which we are developing, or may try to develop, our product candidates. For additional information regarding our competition, see “Item 1. Business—Competition,” above. I Regulatory approval and/or the achievement of clinical or commercial success of one or more competing products or product candidates may reduce or eliminate the market for our product candidates.. In addition, if one or more competing products fail to obtain regulatory approval or achieve clinical or commercial success and are perceived by regulators, healthcare providers, third-party payors or potential patients as comparable to our product candidates, our regulatory strategy could be impaired, our ability to obtain regulatory approval for our product candidates could be delayed or prevented, or the market for our product candidates may be reduced or eliminated.
Competitive products may make any product we develop obsolete or noncompetitive before we recover the expense of developing and commercializing the product. If we or our collaborators are unable to compete effectively, our opportunity to generate revenue from the sale of our products we may develop, if approved, would be adversely affected.
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, our reputation could suffer, 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 clinical trials of our product candidates or products. We also face potential product liability for use or misuse of our products that obtain regulatory approval and are commercialized. We recently settled a product liability lawsuit, which we determined was not material, relating to the use in a clinical trial of a product candidate that we are no longer developing and have no plans to pursue, and that is not related to the cell therapy candidates we currently are developing. See Note 14 (Commitments and Contingencies) and Note 19 (Subsequent Events) to our consolidated financial statements included this report and “Item 3. Legal Proceedings” in Part I of this report for additional information. We may not successfully defend any product liability claims made against us in the future. Product liability claims could delay or prevent completion of our clinical development programs. Such claims could result in FDA or other regulatory authority investigations of the safety of our product candidates or products, our manufacturing processes and facilities or our marketing programs. 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 and operating results. In addition, even if we successfully defend against product liability claims, we could incur substantial costs in defending against claims and suffer significant reputational harm that negatively impacts our business.
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The use or misuse of our product candidates in clinical trials and the sale of any products for which we obtain marketing approval exposes us to the risk of product liability claims. Product liability claims might be brought against us by those who use our product candidates in clinical trials, consumers, healthcare providers, pharmaceutical companies or others selling or otherwise coming into contact with our products. There is a risk that our product candidates or future products may induce adverse events. If we cannot successfully defend against product liability claims, we could incur substantial liability and costs. Legal proceedings are inherently uncertain and unpredictable and proceedings believed to be immaterial could prove to have a material adverse effect on our business, operating results and financial condition. Regardless of merit or eventual outcome, product liability claims may result in:
| ● | reputational harm; | |
| ● | initiation of investigations by regulators; | |
| ● | withdrawal of clinical trial participants; | |
| ● | substantial costs due to related litigation; | |
| ● | distraction of management’s attention from our primary business; | |
| ● | substantial monetary awards to patients or other claimants; | |
| ● | the inability to complete development of or commercialize our product candidates; | |
| ● | product recalls, withdrawals or labeling, marketing or promotional restrictions; and | |
| ● | decreased demand for any marketed products. |
We may not be able to maintain appropriate product liability insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to product liability claims. If and when we obtain marketing approval for a product candidate and prior to commercial launch, we intend to expand our insurance coverage to include the sale of commercial products; however, we may be unable to obtain appropriate 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 the price of our common shares to decline and, if the amount of damages exceeds our insurance coverage, could adversely affect our results of operations and business.
We currently have no marketing and sales force or distribution capabilities. If we are unable to establish effective internal capabilities or effectively collaborate with third parties to market and sell our product candidates, if approved, our ability to generate product revenue will suffer.
We currently have no marketing, sales, or distribution capabilities because all of our cell therapy product candidates are in preclinical or early clinical development, or in OpRegen’s case, we have entered into an agreement whereby Roche has commercialization responsibility for the product, if approved. We will need to build on a territory-by-territory basis marketing, sales, distribution and supporting capabilities to commercialize any other product candidates that obtains regulatory approval, or selectively seek to enter into similar strategic collaborations or otherwise outsource these functions to one or more third parties such as contract sales organizations and distributors. There are significant risks involved if we decide to establish our own sales and marketing capabilities or enter into arrangements with third parties to perform these functions. To the extent that we enter into collaboration agreements with respect to marketing, sales, or distribution, our product revenue may be lower than if we directly marketed or sold any approved products. Such collaborative arrangements with partners may place the commercialization of our products outside of our control and would subject us to a number of risks, including that we may not be able to control the amount or timing of resources that a commercialization collaborator devotes to our products or that a collaborator’s willingness or ability to complete its obligations may be adversely affected by business combinations or significant changes in the collaborator’s business strategy. If we are unable to enter into these arrangements when needed on acceptable terms, or at all, we may not be able to successfully commercialize any of our product candidates that receive regulatory approval, or any such commercialization may experience delays or limitations. Building our own sales and marketing team with technical expertise and supporting distribution capabilities, would require a significant capital investment and require significant attention of our senior management team to manage, and any failure or delay in the development of those internal sales, marketing and distribution capabilities would adversely impact the commercialization of any of our product candidates that obtain approval. If we are unable to develop adequate marketing and sales capabilities on our own or effectively partner with third parties, our ability to generate product revenue will suffer and we may incur significant additional losses, which would have a material adverse effect on our business, financial condition, and results of operations.
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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:
| ● | 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; | |
| ● | our patents may be challenged by third parties; | |
| ● | others may have patents of which we are not aware 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; | |
| ● | the pending patent applications to which we have rights may not result in issued patents; | |
| ● | our patents may have claims that are inadequate to protect our competitive position on our products; and | |
| ● | we may not be successful in developing additional proprietary technologies that are patentable. |
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. 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.
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We also rely on trade secrets, including unpatented know-how, technology and other proprietary information, to establish and maintain a competitive position for our product candidates and any products. We seek to protect these trade secrets, in part, by entering into nondisclosure and confidentiality agreements with parties who have access to them, such as our employees, corporate collaborators, outside scientific collaborators, contract manufacturers, consultants, advisors and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants. Despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts both within and outside the United States may be less willing or unwilling to protect trade secrets. Furthermore, if a competitor lawfully obtained or independently developed any of our trade secrets, we would have no right to prevent such competitor from using that technology or information to compete with us, which could harm our competitive position. Additionally, if the steps taken to maintain our trade secrets are deemed inadequate, we may have insufficient recourse against third parties for misappropriating the trade secrets.
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, or our trade secrets, 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 governmental entities are subject to rights maintained by those governments.
Research and development we perform that is funded by grants from governmental entities and any intellectual property that we create using those grants is subject to certain rights of the governmental entities to require that we license or grant rights to the intellectual property developed using that funding in certain circumstances.
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We may become subject to claims for remuneration or royalties for assigned service invention rights by our employees, which could result in litigation and adversely affect our business.
We enter into agreements with our employees pursuant to which they agree that any inventions created in the scope of their employment are assigned to us or owned exclusively by us, without the employee retaining any rights. A significant portion of our intellectual property has been developed by our employees in the course of their employment for us. Under the Israeli Patent Law, 5727-1967 (the “Patent Law”), inventions conceived by an employee during the scope of his or her employment with a company are regarded as “service inventions,” which belong to the employer, absent a specific agreement between the employee and employer giving the employee service invention rights. The Patent Law also provides that if there is no such agreement between an employer and an employee, the Israeli Compensation and Royalties Committee, a body constituted under the Patent Law, shall determine whether the employee is entitled to remuneration for his or her inventions. Previous decisions by the Israeli Compensation and Royalties Committee have created uncertainty in this area regarding whether the right to receive remuneration for service inventions can be voluntarily waived by an employee and whether such waiver is enforceable. In addition, the Committee determined that even if such right to receive compensation and royalties for service inventions may be waived, the waiver should be specific. Subsequent court cases have not provided significant clarity on these matters.
The Israeli Supreme Court noted (in an obiter dictum) in 2012, without making any decisive ruling, that an employee who contributes to an invention during his employment could be allowed to seek compensation for it from their employer, even if the employee’s contract of employment specifically states otherwise and the employee has transferred all intellectual property rights to the employer. The Israeli Supreme Court considered the possibility that a contract that revokes the employee’s right for royalties and compensation may not necessarily foreclose the right of the employee to claim a right for royalties. As a result, even if we believe that none of our employees has any rights in any of our intellectual property, or to receive royalties, it is unclear if, and to what extent, our employees may be able to claim compensation with respect to our future revenue. As a result, we may receive less revenue from future products if such claims are successful, or incur additional royalty expenses, which in turn could impact our future profitability.
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.
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. 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.
Our commercial success depends in part on our avoiding infringement of the patents and proprietary rights of third parties. We cannot be certain that our platform technologies, product candidates, and other proprietary technologies we may develop will not infringe existing or future patents owned by third parties. The legal and administrative landscape related to infringement of the patents and proprietary rights of third parties is fluid as there is a substantial amount of litigation involving patents and other intellectual property rights in the biotechnology and pharmaceutical industries, as well as administrative proceedings for challenging patents. These include interference, derivation, inter partes review, post-grant review, and reexamination proceedings before the USPTO or oppositions and other comparable proceedings in foreign jurisdictions. Litigation and other legal proceedings relating to intellectual property claims, with or without merit, are unpredictable and generally expensive and time-consuming and, even if resolved in our favor, are likely to divert significant resources from our core business and distract our technical and management personnel from their normal responsibilities. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing, or distribution activities. We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources and more mature and developed intellectual property portfolios. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to enter into or compete in the marketplace.
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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 product candidates. 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.
As described elsewhere in this Risk Factors section, we are dependent on our collaboration with Roche to develop and commercialize OpRegen, and we could become dependent upon one or more possible future 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. Termination of a collaboration agreement by a collaboration partner could dissuade other organizations from collaborating with us and negatively impact our ability to enter into new collaborations or achieve favorable collaboration terms. 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, or that we have a dispute that harms our working relationship and requires significant resources to resolve, or that we are unable to resolve on our own, resulting in costly legal proceedings. 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 currently rely, and plan to continue to rely, on third parties such as CROs, data management companies, contract clinical research associates, medical institutions, clinical investigators and contract laboratories to assist with preclinical development and conduct clinical trials of our product candidates. Due to our reliance on these third parties, we may not directly control the timing, conduct and expense of our clinical trials. If the third parties we engage 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 public health crises could result in staffing shortages at these third parties, which could disrupt our clinical studies, increase development timelines, and have a material adverse impact on our business, prospects, financial condition and results of operations.
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We obtain reagents and specialized materials and equipment required for the manufacture of our cell therapy product candidates from third-party manufacturers and suppliers, which include, in some instances, sole source manufacturers and suppliers. The loss of these suppliers, or their failure to provide us with sufficient key materials or equipment on a timely basis at an acceptable cost, or at all, could materially and adversely affect our business.
The development and manufacture of our cell-based product candidates depends on the availability of reagents and specialized materials and equipment which are required to be acceptable to the FDA and applicable foreign regulatory authorities, and such reagents, materials, and equipment may not be available to us on acceptable terms or at all. We rely on third-party suppliers for key components required for the manufacture of our product candidates, including in some cases, sole source manufacturers and suppliers, and we currently do not have long-term commitments or supply agreements to obtain certain of these components.
We use reagents, in our manufacturing processes, some of which are manufactured or supplied by small companies with limited resources and experience with respect to supporting clinical or commercial biologics production. We currently depend on a limited number of vendors for certain materials and equipment used in the manufacture of our product candidates. Some of these suppliers may not have the capacity to support manufacturing of products under cGMP or may otherwise be ill-equipped to support our needs, particularly as we scale up our manufacturing processes. Reagents and other key materials from these suppliers may have inconsistent attributes and introduce variability into our manufactured process and possibly into product candidates, which may contribute to variable patient outcomes and possible adverse events. We do not have long-term commitments or supply agreements with many of these suppliers and may not be able to enter into supply contracts with them on acceptable terms or at all. Accordingly, we may experience delays in receiving key materials and equipment to support our clinical, and ultimately commercial, manufacturing operations.
For some of the reagents, materials, and equipment we require, we currently rely and may in the future rely on sole source suppliers or a limited number of suppliers. We may be unable to continue to source reagents, materials, or equipment from any of these suppliers for various reasons, including due to regulatory actions or requirements affecting a supplier, adverse financial or other strategic developments experienced by a supplier, labor disputes or shortages, unexpected demands from other customers and supply limitations, or quality issues. We cannot be sure that these suppliers will remain in business, or that they will not be purchased by one of our competitors or another company that is not interested in continuing to supply us with these materials in sufficient quantities, on acceptable terms, or at all. The lead time needed to establish a relationship with a new supplier who has access to the required raw materials can be lengthy. The time and effort to identify and qualify a new supplier could result in additional costs, diversion of resources, or reduced manufacturing yields, any of which may negatively impact our business. Additionally, due to global geopolitical, economic, and other factors beyond our control, there has been, and there may continue to be, a shortage of key materials and equipment that are necessary to manufacture our product candidates, including certain consumables such as bags, flasks, and pipette tips, which has affected and may continue to affect our ability to obtain the materials and equipment necessary to manufacture our product candidates and increased our research and development costs. Failures or difficulties faced at any level of our supply chain could delay or impede the development and commercialization of our product candidates and adversely affect our business, financial condition and results of operations. In light of the unpredictable nature of the current economic climate, including global rates of inflation, it may be increasingly difficult for us to predict and control our future expenses for the reagents, materials, and equipment we require to manufacture our product candidates. If any of the foregoing events were to occur, we may experience significant delays in manufacturing our product candidates, and in turn, in the commencement and completion of preclinical development and testing or clinical trials and potential regulatory approval of our product candidates, which could harm our business.
If we are required to change suppliers, or modify the components, equipment, materials or disposables used for the manufacture of our product candidates, we may be required to change our manufacturing operations or clinical trial protocols or to provide additional data to regulatory authorities in order to use any alternative components, equipment, materials or disposables, any of which could set back, delay, or increase the costs required to complete our clinical development and commercialization of our product candidates. Additionally, any such change or modification may adversely affect the safety, efficacy, stability, or potency of our product candidates, and could adversely affect our clinical development of our product candidates and harm our business.
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In some cases, specialized delivery systems or devices may be used to administer our cell therapy product candidates, and we may rely on third parties to manufacture and supply those systems or devices and provide us with intellectual property rights to develop and commercialize them with our cell therapies, if approved. If we are not able to obtain those systems or devices in quantities needed in accordance with our quality standards and regulatory requirements and at acceptable costs, or at all, or those systems or devices fail to perform as expected, clinical development and possible regulatory approval of our product candidates may be significantly delayed and more expensive than anticipated and our business may suffer.
The administration of certain of our cell therapy product candidates requires invasive surgical procedures. We may seek to improve the accuracy or reduce the complexity, risk and variability of administering of our cells to the targeted site in the human body by integrating into the surgical procedures specialized delivery systems or devices developed, manufactured and supplied by third parties. For example, we believe a novel parenchymal spinal delivery (“PSD”) system developed by a third party could improve usability and precision in administering OPC1 to the injury site in the spinal cord, hence we entered into an exclusive option and license agreement with that third party to collaborate on the clinical testing of the PSD system for OPC1. To the extent we collaborate with third parties for specialized delivery systems or devices for administration of our product candidates, we may become dependent on those third parties and their contract manufacturers and suppliers not only for rights to use those systems or devices, but also for the manufacture and supply of those systems or devices in sufficient quantities and at acceptable quality levels and costs for our clinical trials, and ultimately to potentially market and sell them with our product candidates, if approved. Our dependence on such third parties is subject to a multitude of risks, including these risks:
| ● | They or their third-party manufacturers might not manufacture in a timely manner the device systems or components in the quantity or quality required to meet our clinical trial needs and, if approved, commercial needs. | |
| ● | They or their third-party manufacturers may not perform as agreed, may terminate their agreements, 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 on a commercial scale, if approved. | |
| ● | They or their third-party manufacturers may not produce the systems or devices in accordance with applicable regulatory requirements, and their processes or facilities may fail inspection by the FDA or corresponding state or foreign regulatory agencies. We will not have control over their compliance with applicable laws and regulations. | |
| ● | They or their third-party manufacturers may not obtain or maintain intellectual property rights necessary for the development, manufacture and, if approved, commercialization of the systems or devices. | |
| ● | They or their third-party manufacturers may experience manufacturing difficulties as a result of resource constraints, labor shortages, supply chain failures, public health emergencies such as the COVID-19 pandemic, geopolitical conflict, acts of terrorism, political or economic instability or crises, natural disasters, or other events outside of their control or the control of their third-party manufacturers. This may result in business closures that adversely affect our ability to obtain clinical or commercial supplies as needed. | |
| ● | We may be subject to product liability exposure arising out of use of the systems or devices to administer our product candidates in clinical trials or, if approved, for commercial use, and our insurance may not cover all potential claims. |
If any such third-party collaborator or their contract manufacturers or suppliers were to encounter any of these difficulties, our ability to commence and conduct clinical trials of certain of our cell therapy product candidates on communicated timelines, or at all, could be jeopardized. These third-party collaborators and their contract manufacturers and suppliers would also be subject to many of the same risks we face in developing our own manufacturing capabilities, as described elsewhere in these Risk Factors. 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 conduct additional clinical trials at additional expense or terminate clinical trials completely. Each risk could delay our clinical trials, any potential 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.
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Risks Pertaining to Our Common Shares
The market price of our common shares has been and may continue to be volatile, and you could lose all or part of your investment.
The trading price of our common shares has been and is likely to continue to be highly volatile. The stock market in general, and the market for biotechnology companies, as well as small cap and microcap companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of particular companies. Broad market and industry factors may negatively affect the market price of our common shares, regardless of our actual operating performance, financial condition or progress in development of our product candidates. The market price for our common stock may be influenced by a variety of factors, some of which are beyond our control, including:
| ● | delays in progress or completion of clinical trials of our product candidates, or other changes in the development status of or anticipated development timeline for our product candidates; | |
| ● | results of clinical and nonclinical studies of our product candidates; | |
| ● | changes in laws or regulations applicable to our product candidates, including but not limited to clinical trial and manufacturing requirements for regulatory approvals; | |
| ● | developments concerning the manufacture or supply of our product candidates; | |
| ● | unanticipated serious safety concerns related to the use of our product candidates or third-party product candidates perceived to be similar; | |
| ● | delays in our regulatory submissions and any adverse development or perceived adverse development with respect to the applicable regulatory authority’s review of such filings, including without limitation the FDA’s issuance of a “refusal to file” letter or a request for additional information; | |
| ● | adverse regulatory decisions relating to our product candidates or third-party product candidates perceived to be similar or competitive to ours; | |
| ● | our inability to establish or maintain important collaborations and license agreements, including any material disputes or amendments; | |
| ● | announcements of strategic collaborations or significant licenses, acquisitions or dispositions, joint ventures or capital commitments by us or companies perceived to be comparable to us; | |
| ● | additions or departures of key personnel; | |
| ● | our cash position and the level of expenses related to development of our product candidates; | |
| ● | announcements or expectations of additional financing efforts; | |
| ● | sales of our common shares by us, our insiders or other shareholders; | |
| ● | trading volume of our common shares; | |
| ● | changes in the market valuation of companies perceived to be comparable to us; | |
| ● | actual or anticipated variations in our operating results; |
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| ● | changes in accounting policies and practices or material weakness or ineffectiveness of our internal controls or disclosure controls; | |
| ● | disagreements with our auditor or termination of an auditor engagement; | |
| ● | disputes or other developments relating to proprietary rights, including patents and trade secrets, or other avenues of market exclusivity for our product candidates or products and product candidates perceived to be competitive to ours; | |
| ● | changes in the structure of healthcare payment systems; | |
| ● | significant lawsuits, including intellectual property, product liability or shareholder litigation; | |
| ● | publication of research reports about us or our industry, or cell therapies in particular, or positive or negative recommendations or withdrawal of research coverage by securities analysts; | |
| ● | actual or potential suspension of trading or delisting of our common shares by our Stocks Exchanges. | |
| ● | inclusion in or exclusion from stock indices such as the Russell 3000® Index; | |
| ● | significant business disruptions caused by natural or manmade disasters, such as the COVID-19 pandemic; | |
| ● | market conditions in the biotechnology sector and general political and economic conditions; and | |
| ● | other factors described in this Risk Factors section. |
In the past, securities class action litigation has often been instituted against companies following periods of volatility in the market price of their shares. This type of litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources, which could materially and adversely affect our business and financial condition.
Because we do not intend to 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 any return to our shareholders will be limited to the appreciation of their shares and, therefore, our common shares may not be a suitable investment for anyone who needs to earn dividend 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 25.0% of our outstanding common shares as of December 31, 2022. 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.
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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, in settlement of lawsuits, 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.
Our articles of incorporation, as amended, authorize us 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 shareholder 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 December 31, 2022, we had 18,173,332 common shares reserved for issuance upon the exercise of outstanding options under our employee stock option plans, and 938,870 common shares reserved for issuance upon the vesting and settlement of restricted stock units under our equity incentive plan. The exercise of outstanding options and vesting and settlement of outstanding restricted stock units would be dilutive to our existing shareholders.
We have used “at the market” (“ATM”) offerings of our common shares under agreements with Cantor Fitzgerald & Co. acting as sales agent and “shelf” registration statements on Form S-3 to raise substantial capital. For information regarding such sales of our common shares see “At the Market (‘ATM’) Offering” in Note 11 (Shareholders’ Equity) to our consolidated financial statements included in this report. We may continue to use ATM offerings to fund our operations. As of December 31, 2022, $63.8 million remained available for sale under our ATM offering program. Additional sales of our common shares in our ATM offering may result in substantial dilution to our existing shareholders and such sales, or the anticipation of such sales, may cause the market price of our common shares to decline.
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 Lineage’s ownership interest in the applicable subsidiary, and correspondingly dilute our shareholders’ 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 Lineage’s ownership interest in the applicable subsidiary, with a resulting dilutive effect on the ownership interest of our shareholders in our consolidated enterprise.
There is no assurance that we will be able to maintain compliance with the NYSE American’s continued listing standards, and failure to do so could result in the suspension of trading or delisting of our common shares, which could substantially impair our shareholders’ ability to sell their shares and our ability to raise additional capital.
Our common shares are listed on the NYSE American. To maintain our listing, we must satisfy several continued listing standards, including financial condition and/or operating results standards, market value and distribution standards, a low selling price standard, and corporate governance standards. For example, for as long as we have net losses for our five most recent fiscal years, the exchange may consider delisting our common shares if our shareholders’ equity is less than $6 million, and under the low selling price standard, if the exchange determines our common shares have been selling for a substantial period of time at a low price per share, which we believe would be an average of less than $0.20 over 30 days, and we fail to effect a reverse stock split within a reasonable time after being notified by the exchange, the exchange will consider de-listing our common shares. In addition, any developments which substantially reduce the size of our company, the nature and scope of our operations, the value or amount of our securities available for the market, or the number of shareholders, may occasion a review of continued listing by the exchange. If a security sells at a price below $0.06, the exchange may immediately suspend the security from further trading on the exchange. We cannot assure you that we will be able to continue to meet the NYSE American’s continued listing requirements.
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The suspension or delisting of our common shares, or the commencement of delisting proceedings, for whatever reason could, among other things, substantially impair our ability to raise additional capital; result in the loss of interest from institutional investors, result in restrictions or prohibitions on brokers from trading in our common shares, result in the loss of confidence in our company by shareholders, collaborators and employees, and result in fewer financing, strategic and business development opportunities. The suspension or delisting of our common stock, or the commencement of delisting proceedings for whatever reason may materially impair our shareholders’ ability to buy and sell shares of our common stock and could have an adverse effect on the market price of, and the efficiency of the trading market for, our common shares. In addition, our common shares have been included in the Russell 3000® Index from time to time. In the short term, inclusion in the index may favorably impact the price, trading volume, and liquidity of our common shares, in part, because holders attempting to track the composition of that index may have been required to buy our common shares, which could cause a material increase in the price at which our common shares trades. If our common shares are removed from the index because they do not meet the criteria for continued inclusion, index funds, institutional investors, or other holders attempting to track the composition of that index may be required to sell our common shares, which would adversely impact the price and frequency at which it trades.
General Risk Factors
We are subject to stringent and changing obligations related to data privacy and security. Our actual or perceived failure to comply with such obligations could lead to regulatory investigations or actions; litigation; fines and penalties; disruptions of our business operations; reputational harm; loss of revenue or profits; and other adverse business consequences.
In the ordinary course of business, we collect, receive, store, process, generate, use, transfer, disclose, make accessible, protect, secure, dispose of, transmit, and share (collectively, processing) personal data and other sensitive information, including data we collect about trial participants in connection with clinical trials. As a result, we are, or may become, subject to numerous data privacy and security requirements related to data privacy, security, protection and transfer under federal, state, local, and foreign laws, regulations, guidance, and industry standards. See “Item 1. Business—Government Regulation—Privacy and Data Security Laws,” above. These requirements may be subject to differing applications and interpretations, which may be inconsistent or conflict among jurisdictions. Preparing for and complying with these requirements requires significant resources and may necessitate changes to our information technologies, systems, and practices and to those of any third parties that process personal data on our behalf.
If we, or our personnel or third parties upon whom rely, fail, or are perceived to have failed, to address or comply with applicable data privacy, security, protection and transfer requirements, we could face significant consequences. These consequences may include, but are not limited to, government enforcement actions (e.g., investigations, fines, penalties, audits, inspections, and similar); litigation (including class-related claims); additional reporting requirements and/or oversight; bans on processing personal data; and orders to destroy or not use personal data. Any of these events could have a material adverse effect on our reputation, business, or financial condition, including but not limited to: loss of customers; interruptions in our business operations (including, as relevant, clinical trials); inability to process personal data or to operate in certain jurisdictions; limited ability to develop or commercialize our products; expenditure of time and resources to defend any claim or inquiry; adverse publicity; or revision or restructuring of our operations. In the United States, privacy and security obligations are often enforced under deceptive and unfair trade practice laws, using theories that a company’s activities were either misleading or unfair.
If our information technology systems or data, or those of third parties upon which we rely, are or were compromised, we could experience adverse consequences resulting from such compromise, including but not limited to regulatory investigations or actions; litigation; fines and penalties; disruptions of our business operations; reputational harm; loss of revenue or profits; loss of customers or sales; and other adverse consequences.
We are dependent on information technology systems and infrastructure to operate our business. In the ordinary course of our business, we may process confidential, and sensitive, including personal data (such as health-related data), intellectual property, and proprietary business information (collectively, sensitive 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 service providers who may have, or could gain, access to sensitive information. In addition, many of those third parties, in turn, subcontract or outsource some of their responsibilities to third parties.
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Cyberattacks, malicious internet-based activity, and online and offline fraud are increasing in frequency, persistence, sophistication and intensity. These threats come from a variety of sources, including traditional computer “hackers,” threat actors, personnel (such as through theft or misuse), sophisticated nation states, and nation-state-supported actors. Some actors now engage and are expected to continue to engage in cyberattacks, including, without limitation, nation-state actors for geopolitical reasons and in conjunction with military conflicts and defense activities. During times of war and other major conflicts, we and the third parties upon which we rely may be vulnerable to a heightened risk of these attacks, including cyberattacks that could materially disrupt our systems and operations, supply chain, and ability to produce, sell and distribute our products. We and the third parties upon which we rely may be subject to a variety of evolving threats, including, but not limited to, malware (including as a result of persistent threat intrusions), malicious code (such as viruses and worms), ransomware attacks, denial-of-service attacks (such as credential stuffing), social engineering attacks (including phishing attacks), personnel misconduct or error, supply-chain attacks, software bugs, server malfunctions, software or hardware failures, loss of data or other technology assets, adware, telecommunication failures, earthquakes, fires, floods, and other similar threats. 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.
Ransomware attacks, including by organized criminal threat actors, nation-states, and nation-state-supported actors, are becoming increasingly prevalent and severe and can lead to significant interruptions in our operations, loss of data and income, reputational harm, and diversion of funds. Extortion payments may alleviate the negative impact of a ransomware attack, but we may be unwilling or unable to make such payments due to, for example, applicable laws or regulations prohibiting such payments. Similarly, supply-chain attacks have increased in frequency and severity, and we cannot guarantee that third parties and infrastructure in our supply chain or our third-party partners’ supply chains have not been compromised or that they do not contain exploitable defects or bugs that could result in a breach of or disruption to our information technology systems or the third-party information technology systems that support us and our services. Additionally, many of our employees who began working from home early in the COVID-19 pandemic continue to work remotely at least part of the time, utilizing network connections outside our premises, which may increase risks to our information technology systems and data. Moreover, the prevalent use of mobile devices by our employees and third-party service providers to access confidential information increases the risk to our information technology systems and data. Future or past business transactions (such as acquisitions or integrations) could also expose us to additional cybersecurity risks and vulnerabilities, as our systems could be negatively affected by vulnerabilities present in acquired or integrated entities’ systems and technologies.
Any of the previously identified or similar threats could cause a security incident or other interruption. A security incident or other interruption could result in unauthorized, unlawful, or accidental acquisition, modification, destruction, loss, alteration, encryption, disclosure of, or access to our proprietary or sensitive information. A security incident or other interruption could disrupt our ability (and that of third parties upon whom we rely) to conduct our business operations and divert significant resources. Though we have insurance that may cover some of the costs and fees resulting from a cyberattack, data security incident, or data breach, that insurance may not be sufficient to cover all of the costs, fees, losses, damages, fines, and penalties that may arising from a data security incident
We may expend significant resources or modify our business activities to try to protect against security incidents. Certain data privacy and security obligations may require us to implement and maintain specific security measures and tools, industry-standard or reasonable security measures to protect our information technology systems and proprietary and sensitive information.
While we have implemented security measures to protect our information technology systems and infrastructure, there can be no assurance that such measures will prevent cyberthreats, cyberattacks, security incidents, data breaches, malware, ransomware attacks and other disruptions that could adversely affect our business. We may be unable in the future to detect vulnerabilities in our information technology systems because such threats and techniques change frequently, are often sophisticated in nature, and may not be detected until after a security incident has occurred. Despite our efforts to identify and remediate vulnerabilities, if any, in our information technology systems, our efforts may not be successful. Further, we may experience delays in developing and deploying remedial measures designed to address any such identified vulnerabilities. In addition, failure to maintain effective internal accounting controls related to security incidents and cybersecurity in general could impact our ability to produce timely and accurate financial statements and subject us to regulatory scrutiny.
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Applicable data privacy and security obligations, including data breach notification laws in the US and elsewhere, may require us to notify relevant stakeholders of security incidents. Such disclosures are costly, and the disclosures or the failure to comply with such requirements could lead to adverse consequences. If we (or a third party upon whom we rely) experience a security incident or are perceived to have experienced a security incident, we may experience adverse consequences. These consequences may include: government enforcement actions (for example, investigations, fines, penalties, audits, and inspections); additional reporting requirements and/or oversight; restrictions on processing sensitive information (including personal data); litigation (including class claims); financial obligations to third parties, indemnification obligations; negative publicity; reputational harm; monetary fund diversions; interruptions in our operations (including availability of data); financial loss; and other similar harms. Security incidents and attendant consequences may cause interruptions in our operations and could result in a material disruption of our programs. For example, the loss of clinical trial or nonclinical study data for our product candidates could result in delays in our regulatory approval efforts and significantly increase our costs due to additional time and resources necessary to recover and verify or potentially reproduce the data.
Our contracts may not contain limitations of liability, and even where they do, there can be no assurance that limitations of liability in our contracts are sufficient to protect us from liabilities, damages, or claims related to our data privacy and security obligations. We cannot be sure that our insurance coverage will be sufficient to protect us from or to mitigate liabilities arising out of our privacy and security practices, that such coverage will continue to be available on commercially reasonable terms or at all, or that such coverage will pay future claims.
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, when required, 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 SEC, and other regulatory authorities, which could require additional financial and management resources.
Geopolitical risks associated with the ongoing military conflict between Russia and Ukraine could have an adverse impact on our business, financial condition and results of operations, including our clinical trials.
Our results of operations are affected by economic conditions, including macroeconomic conditions and levels of business confidence. The war in Ukraine and the uncertain nature, magnitude, and duration of the conflict and the potential effect of sanctions and other measures being imposed in response thereto have contributed to increased levels of economic and political uncertainty, which could have an adverse impact on macroeconomic factors that affect the financial markets, the global economy and our business and operations. Additionally, the ongoing conflict in Ukraine may disrupt the ability of third parties on which we rely to perform in accordance with our expectations, including on commercial research organizations to conduct clinical trials. Moreover, enrollment and retention of clinical trial participants may be adversely affected. We cannot be certain what the overall impact of this conflict will be on our ability to conduct and complete our clinical trials on schedule. However, interruptions of our clinical trials could significantly delay our clinical development plans and potential authorization or approval of our product candidates, which could increase our costs and jeopardize our ability to successfully commercialize our product candidates.
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We may be adversely affected by the effects of inflation and other macroeconomic factors.
Inflation has the potential to adversely affect our liquidity, business, financial condition and results of operations by increasing our overall cost structure. The existence of inflation in the economy has resulted in, and may continue to result in, higher interest rates and capital costs, supply shortages, increased costs of labor, components, manufacturing and shipping, as well as weakening exchange rates and other similar effects. As a result of inflation, we may experience cost increases. Changes in other economic conditions, including rising interest rates, ongoing pandemics, including the COVID-19 pandemic, lower consumer confidence, volatile equity capital markets and ongoing supply chain disruptions and the impacts of the war in Ukraine, may also affect our business. Although we may take measures to mitigate the effects of economic conditions, if these measures are not effective, our business, financial condition, results of operations and liquidity could be materially adversely affected. Even if such measures are effective, there could be a difference between the timing of when the benefits of such measures and the effects of such conditions impact our results of operations. Given these economic considerations, among other potential consequences, cost increases may outpace our expectations, causing us to use our cash and other liquid assets faster than forecasted. If this happens, we may need to raise additional capital to fund our operations sooner than expected, which may not be available in sufficient amounts or on reasonable terms, if at all. See also the discussion in this Risk Factors section under “We will need to obtain substantial additional funding to complete the development and seek regulatory approval of our product candidates and to commercialize products approved for marketing, if any. If we are unable to obtain adequate capital when needed, we may delay, reduce, limit the pace of, suspend or discontinue our product and technology development programs or other operations, which could significantly harm our business and prospects and cause the market price of our common shares to decline.” In addition, if the risks described in this paragraph materialize, the possibility of other risks described herein materializing and/or the impact of those risks may increase.
Adverse litigation judgments or settlements resulting from legal proceedings in which we may be involved could expose us to monetary damages or limit our ability to operate our business.
We recently settled a putative shareholder class action lawsuit, as well as a product liability lawsuit, and may in the future become involved in other class actions, derivative actions, private actions, collective actions, investigations, and various other legal proceedings by shareholders, collaborators, clinical trial participants, employees, suppliers and other vendors, service providers, competitors, government agencies, or others. The results of any such litigation, investigations, and other legal proceedings are inherently unpredictable and expensive. Although some of the costs and expenses of such claims may be covered by insurance, any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, damage our reputation, require significant amounts of management time, and divert significant resources. Additionally, a dramatic increase in the cost of directors’ and officers’ liability insurance may cause us to opt for lower overall policy limits or to forgo insurance that we may otherwise rely on to cover significant defense costs, settlements, and damages awarded to plaintiffs. If any of these legal proceedings were to be determined adversely to us, or we were to enter into a settlement arrangement, we could be exposed to monetary damages or limits on our ability to operate our business, which could have an adverse effect on our business, financial condition, results of operations and prospects. In addition, the uncertainty associated with material litigation could lead to increased volatility in our stock price.
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Our business could be negatively impacted by environmental, social and corporate governance (“ESG”) matters or our reporting of such matters.
There is an increasing focus from certain investors, employees, collaborators, and other stakeholders concerning ESG matters. While we have internal efforts directed at ESG matters and preparations for any increased required future disclosures, we may be perceived to be not acting responsibly in connection with these matters, which could negatively impact us. Moreover, the SEC has recently proposed, and may continue to propose, certain mandated ESG reporting requirements, such as the SEC’s proposed rules designed to enhance and standardize climate-related disclosures, which, if adopted, would significantly increase our compliance and reporting costs and may also result in disclosures that certain investors or other stakeholders deem to negatively impact our reputation, which could adversely affect the price of our common shares. In addition, except as required by SEC and applicable stock exchange rules, we currently do not generally report on ESG matters, including our environmental emissions, and lack of reporting could result in certain institutional and other investors declining to invest in 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 shareholder proposals, or otherwise attempt to effect changes and assert influence on our board of directors and management, and the SEC’s new “universal proxy” rules could significantly lower the cost and increase the ease and likelihood of shareholder activism. 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 collaboration 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 current business strategy. We may choose to initiate, or may become subject to, litigation as a result of a proxy contest or matters arising from a 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 the price of our common shares based upon temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business. Furthermore, the trading value of and demand for our common shares could be adversely affected by allegations made or reports issued by short sellers, analysts, activists or others regarding our business, further influencing volatility in the market price of our common shares.
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.
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| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
| ITEM 2. | PROPERTIES |
General
We lease all the properties from which we operate our business. In general, we believe that our properties are well-maintained, adequate and suitable for our current operations and for our operations in the foreseeable future. See Note 14 (Commitments and Contingencies) to our consolidated financial statements included in this report for additional information regarding the properties we lease.
Lineage Facilities
Our corporate headquarters are in an office park in Carlsbad, California. We also lease industrial space adjacent to our corporate headquarters. The lease for office space we previously leased in Alameda, California expired on January 31, 2023.
Cell Cure Facilities
Under various leases, Cell Cure leases office and laboratory space in the Bio Park on the campus of the Hadassah University Hospital in Jerusalem, Israel.
| ITEM 3. | LEGAL PROCEEDINGS |
We are not currently a party to any material legal proceedings. From time-to-time we may be involved in a variety of claims or litigation proceedings. Such proceedings may initially be viewed as immaterial but could later prove to be material. Litigation proceedings are inherently unpredictable and excessive verdicts do occur. Given the inherent uncertainties in litigation, even when we can reasonably estimate the amount of possible loss or range of loss and reasonably estimable loss contingencies, the actual outcome may change in the future due to new developments or changes in approach. In addition, such claims or litigation proceedings could involve significant expense and diversion of management’s attention and resources from other matters.
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
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PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
Our common shares are listed on the NYSE American and on the Tel Aviv Stock Exchange under the ticker symbol LCTX.
Holders
As of March 1, 2023, there were approximately 366 record holders of our common shares. The number of beneficial owners of our common shares is substantially greater than the number of record holders because a large portion of our common shares is held of record through brokerage firms in “street name”.
Dividend Policy
We have not paid cash dividends on our common shares and we do not anticipate paying cash dividends on our common shares in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws and contractual limitations, and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors may deem relevant.
Recent Sales of Unregistered Securities
Except as previously reported in our quarterly reports on Form 10-Q and current reports on Form 8-K filed with the SEC, during the year ended December 31, 2022, there were no unregistered sales of equity securities by us during the year ended December 31, 2022.
Issuer Purchases of Equity Securities
None.
| ITEM 6. | RESERVED |
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| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide information necessary to understand our audited consolidated financial statements for the two-year period ended December 31, 2022, and highlight certain other information which, in the opinion of management, will enhance a reader’s understanding of our financial condition, changes in financial condition and results of operations. In particular, the discussion is intended to provide an analysis of significant trends and material changes in our financial position and the operating results of our business during the year ended December 31, 2022 as compared to the year ended December 31, 2021. This discussion should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report. These historical financial statements may not be indicative of our future performance. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risks described throughout this report, particularly in “Item 1A. Risk Factors.”
Company and Business Overview
We are a clinical-stage biotechnology company developing novel cell therapies to address unmet medical needs. Our programs are based on our proprietary cell-based technology platform and associated development and manufacturing capabilities. From this platform, we design, develop, manufacture, and test specialized human cells with anatomical and physiological functions similar to, or identical to, cells found naturally in the human body. Cells which we manufacture are created by specific developmental biological differentiation protocols that we apply to established, well-characterized, and self-renewing pluripotent cell lines. These cells are transplanted into patients and are designed to (a) replace or support cells that are absent or dysfunctional due to degenerative disease, aging, or traumatic injury, and (b) restore or augment functional activity in the affected person.
Our strategy is to efficiently leverage our technology platform and our development, formulation, delivery, and manufacturing capabilities to advance our programs internally, or in conjunction with strategic partners, to further enhance their value and probability of success. As one example, in December 2021 we entered into a Collaboration and License Agreement with F. Hoffmann-La Roche Ltd and Genentech, Inc., a member of the Roche Group, wherein we granted to Roche exclusive worldwide rights to develop and commercialize retinal pigment epithelium cell therapies, including our proprietary cell therapy program known as OpRegen®, for the treatment of ocular disorders, including geographic atrophy (GA) secondary to age-related macular degeneration (AMD). Under the terms of the Roche Agreement, Lineage received a $50.0 million upfront payment and is eligible to receive up to $620.0 million in certain developmental, regulatory, and commercialization milestone payments. Lineage also is eligible to receive tiered double-digit percentage royalties on net sales of OpRegen in the U.S. and other major markets. See Note 14 (Commitments and Contingencies) to our consolidated financial statements included elsewhere in this Report for discussion on the Roche Agreement.
As of December 31, 2022, we have five allogeneic, or “off-the-shelf,” cell therapy programs in development, of which three have reached clinical testing:
Product Candidates
| ● | OpRegen®, an allogeneic retinal pigment epithelium cell replacement therapy currently in a Phase 2a multicenter clinical trial, being conducted by Genentech, for the treatment of geographic atrophy (GA) secondary to age-related macular degeneration (AMD), also known as atrophic or dry AMD. A previous Phase 1/2a trial conducted by Lineage enrolled twenty-four (24) individuals with dry AMD with GA. In December 2021, this program was partnered with Roche for further clinical development and commercialization. | |
| ● | OPC1, an allogeneic oligodendrocyte progenitor cell therapy currently in long-term follow-up from a Phase 1/2a multicenter clinical trial for cervical spinal cord injuries. To date, five (5) patients with thoracic spinal cord injuries and twenty-five (25) patients with cervical spinal cord injuries have been enrolled in clinical trials of OPC1. The clinical development of OPC1 has been partially funded by $14.3 million received under a grant from the California Institute for Regenerative Medicine. Additional clinical trials are being planned. |
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| ● | VAC, an allogeneic cancer immunotherapy comprised of antigen-presenting dendritic cells. One of the VAC product candidates, VAC2, is currently in a Phase 1 clinical trial in non-small cell lung cancer. This clinical trial is being funded and conducted by Cancer Research UK, one of the world’s largest independent cancer research charities. An additional VAC-based product candidate is in preclinical development with our partner, Immunomic Therapeutics, Inc., for the treatment of glioblastoma multiforme.
| |
| ● | ANP1, an allogeneic auditory neuron progenitor cell transplant currently in preclinical development for the treatment of debilitating hearing loss. | |
| ● | PNC1, an allogeneic photoreceptor cell transplant currently in preclinical development for the treatment of vision loss due to photoreceptor dysfunction or damage. |
Other Programs
We have additional undisclosed product candidates being considered for development, which cover a range of therapeutic areas and unmet medical needs. Generally, these product candidates are based on the same platform technology and employ a similar guided cell differentiation and transplant approach as the product candidates detailed above, but in some cases may also include genetic modifications designed to enhance efficacy and/or safety profiles.
In addition to seeking to create value for shareholders by developing product candidates and advancing those candidates through clinical development, we also may seek to create value from our large patent estate and additional related technologies and capabilities, through partnering and/or strategic transactions.
Critical Accounting Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts in our consolidated financial statements and related notes. Our significant accounting policies are described in Note 2 (Significant Accounting Policies) to our consolidated financial statements included elsewhere in this report. We have identified below our critical accounting policies and estimates that we believe require the greatest amount of judgment. On an ongoing basis, we evaluate estimates which are subject to significant judgment, including those related to going concern assessment of our consolidated financial statements, useful lives associated with long-lived assets, including evaluation of asset impairment, allowances for uncollectible accounts and financing receivables, valuing shares owned in nonconsolidated companies using the equity method of accounting, loss contingencies, deferred income taxes and tax reserves, including valuation allowances related to deferred income taxes, and assumptions used to value stock-based awards, debt or other equity instruments. Actual results could differ materially from those estimates. On an ongoing basis, we evaluate our estimates compared to historical experience and trends which form the basis for making judgments about the carrying value of assets and liabilities. To the extent that there are material differences between our estimates and our actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.
We believe the assumptions and estimates associated with the following have the greatest potential impact on our consolidated financial statements.
Going concern assessment – In accordance with Accounting Standards Update 2014-15, Presentation of Financial Statements – Going Concern, we assess going concern uncertainty in our consolidated financial statements to determine if we have sufficient cash and cash equivalents on hand and working capital to operate for a period of at least one year from the date our consolidated financial statements are issued or are available to be issued, which is referred to as the “look-forward period” as defined by ASU No. 2014-15. As part of this assessment, based on conditions that are known and reasonably knowable to us, we will consider various scenarios, forecasts, projections, and estimates, and we will make certain key assumptions, including the timing and nature of projected cash expenditures or programs, and our ability to delay or curtail those expenditures or programs, if necessary, among other factors. Based on this assessment, as necessary or applicable, we make certain assumptions concerning our ability to curtail or delay research and development programs and expenditures to the extent we deem probable those implementations can be achieved and we have the proper authority to execute them within the look-forward period in accordance with ASU 2014-15.
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Revenue recognition - Lineage recognizes revenue in accordance with Financial Accounting Standards Board (“FASB”) ASU 2014-09, Revenues from Contracts with Customers (Topic 606), and in a manner that depicts the transfer of control of a product or a service to a customer and reflects the amount of the consideration it is entitled to receive in exchange for such product or service. In doing so, Lineage follows a five-step approach: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations; and (v) recognize revenue when (or as) the customer obtains control of the product or service. Lineage considers the terms of a contract and all relevant facts and circumstances when applying the revenue recognition standard. Lineage applies the revenue recognition standard, including the use of any practical expedients, consistently to contracts with similar characteristics and in similar circumstances. As part of the accounting treatment for these contracts, we must develop estimates and assumptions that require judgement to determine the underlying stand-alone selling price for each performance obligation which determines how the transaction price is allocated among the performance obligations.
Collaborative agreements - We review collaborative agreements to determine if the accounting treatment falls under Accounting Standards Codification, Topic 606, Revenue from Contracts with Customers (“ASC 606”), or Accounting Standards Codification Topic 808, Collaborative Arrangements (“ASC 808”). While these agreements may be within the scope of ASC 808, we may analogize to ASC 606 for some aspects of the agreements.
The terms of our collaborative agreements typically include one or more of the following: (i) upfront fees; (ii) milestone payments related to achievement of development or commercial goals; (iii) royalties on net sales of licensed products; and (iv) reimbursement of cost-sharing of R&D expenses. Each of these payments eventually result in collaboration revenues. When a portion of non-refundable upfront fees or other payments received are allocated to continuing performance obligations under the terms of a collaborative arrangement, they are recorded as deferred revenue and recognized as collaboration revenue when (or as) the underlying performance obligation is satisfied.
To identify the performance obligations within the collaboration agreements, we first identify all the promises in the contract (i.e., explicit and implicit), which may include a customer option to acquire additional goods or services for free or at a discount. We exclude any immaterial promises from the assessment of identifying performance obligations. When an option is identified as providing a customer with a material right, the option is identified as a performance obligation. A portion of the transaction price is then allocated to the option and recognized when (or as) the future goods or services related to the option are provided or when the option expires.
As part of the accounting treatment for these agreements, we must develop estimates and assumptions that require judgement to determine the underlying stand-alone selling price for each performance obligation which determines how the transaction price is allocated among the performance obligations. The following items are estimated in the calculation of the stand-alone selling price: forecasted revenues and development costs, development timelines, discount rates and probabilities of technical and regulatory success. We evaluate each performance obligation to determine if they can be satisfied at a point in time or over time, and we measure the services delivered to our collaboration partners each reporting period, which is based on the progress of the related program. If necessary, we adjust the measure of performance and related revenue recognition. Any such adjustments are recorded on a cumulative catch-up basis which would affect revenue and net income (loss) in the period of adjustment. In addition, variable consideration (e.g., milestone payments) must be evaluated to determine if it is constrained and, therefore, excluded from the transaction price.
Upfront fees - If a license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize collaboration revenues from the transaction price allocated to the license when the license is transferred to the licensee, and the licensee is able to use and benefit from the license. When the license is determined to be non-distinct, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time, and, if over time, the appropriate method of measuring progress for purposes of recognizing collaboration revenue from the allocated transaction price. For example, when we receive upfront fees for the performance of research and development services, or when research and development services are not considered to be distinct from a license, we recognize collaboration revenue for those units of account over time using a measure of progress. We evaluate the measure of progress at each reporting period and, if necessary, adjust the measure of performance and related revenue as a change in estimate.
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Milestone payments - At the inception of each collaboration agreement that includes milestone payments (variable consideration), we evaluate whether the milestones are considered probable of being reached and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our or the collaboration partner’s control, such as non-operational developmental and regulatory approvals, are generally not considered probable of being achieved until those approvals are received. At the end of each reporting period, we re-evaluate the probability of achievement of milestones that are within our or the collaboration partner’s control, such as operational developmental milestones and any related constraint, and if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect collaboration revenues and net income (loss) in the period of adjustment. Revisions to our estimate of the transaction price may also result in negative collaboration revenues and net income (loss) in the period of adjustment.
Research and development – Research and development expenses consist of costs incurred for company-sponsored, collaborative and contracted research and development activities. These costs include direct and research-related overhead expenses including compensation and related benefits, stock-based compensation, consulting fees, research and laboratory fees, rent of research facilities, amortization of intangible assets, and license fees paid to third parties to acquire patents or licenses to use patents and other technology. Research and development costs which have an alternative future use will be capitalized as tangible assets, and costs with no future benefit or alternative use will be expensed as incurred. Research and development expenses incurred and reimbursed by grants from third parties approximate the grant income recognized in the consolidated statements of operations. Royalty expenses or sublicensing fees are recorded as research and development costs, unless these costs are associated with royalties from product sales, which we classify as cost of sales on our consolidated statements of operations. We estimate preclinical, clinical, and other research related expenses based on services performed, pursuant to arrangements with contract research organizations, that conduct studies and research on our behalf. We estimate these expenses based on regular reviews with internal management personnel and external service providers as to the progress or stage of completion of services and the contracted fees to be paid for such services. Based upon the combined inputs of internal and external resources, if the actual timing of the performance of services or the level of effort varies from the original estimates, we will adjust the accrual accordingly.
Stock-based compensation – We follow accounting standards governing share-based payments, which require the measurement and recognition of compensation expense for all share-based compensation awards made to directors and employees, including employee stock options, based on estimated fair values. We utilize the Black-Scholes option pricing model. Our determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, expected stock price volatility over the term of the awards, and the expected term of options granted, which is derived using the simplified method, which is an average of the contractual term of the option and its vesting period, as we do not have sufficient historical exercise data. The risk-free rate is based on the U.S. Treasury yield in effect at the time of grant for U.S. Treasury notes with maturities similar to the expected term of the awards. Forfeitures are accounted for as they occur.
For restricted stock unit awards (“RSUs”) subject to service and/or performance vesting conditions, the grant-date fair value is established based on the closing price of Lineage’s common shares on such date. Stock-based compensation expense for RSUs subject to only service conditions is recognized on a straight-line basis over the service period. Stock-based compensation expense for RSUs with both service and performance conditions is recognized on a graded basis only if it is probable that the performance condition will be achieved. Lineage accounts for forfeitures of RSUs as they occur in determining stock-based compensation expense. For RSUs subject to a market condition, the grant-date fair value is estimated using a Monte Carlo valuation model. The model is based on random projections of stock price paths and must be repeated numerous times to achieve a probabilistic assessment. Lineage recognizes stock-based compensation expense for RSUs subject to market-based vesting conditions regardless of whether it becomes probable that the vesting conditions will be achieved, and stock-based compensation expense for such RSUs is not reversed if vesting does not actually occur.
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Although the fair value of employee stock options is determined in accordance with FASB guidance, changes in the assumptions can materially affect the estimated value and therefore the amount of compensation expense recognized in the consolidated financial statements. In management’s opinion, the existing valuation models may not provide an accurate measure of the fair value of employee stock options because the option-pricing model value may not be indicative of the fair value that would be established in a willing buyer/willing seller market transaction.
Results of Operations
Comparison of Years Ended December 31, 2022 and 2021
Revenues
The following table shows our revenues for the years ended December 31, 2022 and 2021 (amounts in thousands except percentages).
| Year Ended December 31, | $ Increase/ | % Increase/ | ||||||||||||||
| 2022 | 2021 | (Decrease) | (Decrease) | |||||||||||||
| Collaboration revenues | $ | 13,367 | $ | 1,120 | $ | 12,247 | 1,093 | % | ||||||||
| Royalties | 1,336 | 2,776 | (1,440 | ) | (52 | )% | ||||||||||
| Grant revenues | - | 445 | (445 | ) | (100 | )% | ||||||||||
| Total revenues | 14,703 | 4,341 | 10,362 | 238 | % | |||||||||||
| Cost of sales | 728 | 1,426 | (698 | ) | (49 | )% | ||||||||||
| Gross profit | $ | 13,975 | $ | 2,915 | $ | 11,060 | 379 | % | ||||||||
Total revenues for the year ended December 31, 2022 were $14.7 million compared to $4.3 million for the year ended December 31, 2021. The $10.4 million increase was primarily due to a $12.2 million increase in collaboration revenues related to the current year recognition of the $50.0 million upfront payment under the Roche Agreement, which was included in deferred revenues at December 31, 2021 (see Note 3 (Revenue) to our consolidated financial statements included in this report for additional information), offset by a $1.4 million decrease in royalties which were significantly higher in the prior year resulting from the recording of royalty revenues of approximately $1.8 million from a certain customer during the prior year based on the customers updated communication to us regarding royalties due, and a $0.4 million decrease in grant revenues due to less grant-related activities during the year. Grant revenues are generated primarily by our subsidiary Cell Cure from the IIA for the development of OpRegen and our bio retina program. The decrease in our grant revenues for the year ended December 31, 2022 as compared to the year ended December 31, 2021, were primarily due to less grant-related activities.
Operating Expenses
Our operating expenses consist of research and development expenses and general and administrative expenses.
Research and development expenses. These expenses consist of costs incurred for company-sponsored, collaborative and contracted research and development activities. These costs include direct and research-related overhead expenses including compensation and related benefits, stock-based compensation, consulting fees, research and laboratory fees, rent of research facilities, amortization of intangible assets, and license fees paid to third parties to acquire patents or licenses to use patents and other technology. Research and development expenses that have an alternative future use will be capitalized as tangible assets, and costs with no future benefit or alternative use will be expensed as incurred. Research and development expenses incurred and reimbursed by grants from third parties approximate the grant income recognized in our consolidated statements of operations. Royalties and sublicensing fees are recorded as research and development expenses, unless they are associated with royalties from product sales, which we classify as cost of sales in our consolidated statements of operations.
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General and administrative expenses. These expenses include employee and director compensation and related benefits, including stock-based compensation, for executive and corporate personnel, professional and consulting fees, and allocated overhead such as facilities rent and equipment rent and maintenance, insurance costs allocated to general and administrative expenses, costs of patent applications, prosecution and maintenance, stock exchange-related costs, depreciation expense, marketing costs, legal and accounting costs, and other miscellaneous.
The following table shows our operating expenses for the years ended December 31, 2022 and 2021 (amounts in thousands, except percentages).
| Year Ended December 31, | $ Increase/ | % Increase/ | ||||||||||||||
| 2022 | 2021 | (Decrease) | (Decrease) | |||||||||||||
| Research and development expenses | $ | 13,987 | $ | 33,914 | $ | (19,927 | ) | (59 | )% | |||||||
| General and administrative expenses | 22,508 | 18,212 | 4,296 | 24 | % | |||||||||||
Research and development expenses. The $19.9 million year-over-year decrease in research and development expense is primarily the result of $21.0 million of royalty and redemption fee expense recorded in 2021 for payments owed to Hadasit and the IIA pursuant to financial obligations to each of them in connection with the $50.0 million upfront payment we received from Roche in January 2022 under the Roche Agreement and for which there was no similar expense in 2022 (see Note 14 (Commitments and Contingencies) to our consolidated financial statements included in this report).
General and administrative expenses. The $4.3 million year-over-year increase in general and administrative expenses was primarily attributable to (i) a $2.1 million increase in legal and litigation expense, (ii) a $1.3 million increase in employee salaries and benefits, (iii) a $0.9 million increase in stock-based compensation related expenses (see Note 12 (Stock Based-Awards) to our consolidated financial statements included in this report for additional information), (iv) a $0.4 million increase for audit and tax services, (v) a $0.2 million increase in insurance costs, (vi) a $0.2 million increase in consulting expenses, (vii) a $0.1 million increase in recruiting and hiring fees, (viii) a $0.1 million increase in travel expenses, (ix) a $0.6 million decrease in patent related costs and (x) a $0.5 million decrease in investor relations expenses.
The following table shows the amount of our total research and development expenses allocated to our primary research and development projects for the periods presented (amounts in thousands, except percentages).
| Year Ended December 31, | ||||||||||||||||
| Amount | Percent of Total | |||||||||||||||
| Program | 2022 | 2021 | 2022 | 2021 | ||||||||||||
| OpRegen® | $ | 5,043 | $ | 25,507 | 36 | % | 75 | % | ||||||||
| OPC1 | 5,039 | 6,145 | 36 | % | 18 | % | ||||||||||
| VAC platform | 2,582 | 2,178 | 19 | % | 6 | % | ||||||||||
| ANP1 | 741 | - | 5 | % | - | % | ||||||||||
| PNC1 | 458 | - | 3 | % | - | % | ||||||||||
| All other programs | 124 | 84 | 1 | % | 1 | % | ||||||||||
| Total research and development expenses | $ | 13,987 | $ | 33,914 | 100 | % | 100 | % | ||||||||
Research and development expenses. For the year ended December 31, 2022, the $19.9 million decrease in total research and development expenses is mainly attributable to: (i) a $20.5 million net decrease in expenses related to our OpRegen program, attributable to last year’s payment of $21.0 million for royalty and redemption fee expenses paid to Hadasit and the IIA, respectively; (ii) a $1.1 million net decrease in expenses related to our OPC1 program, primarily related to a decrease in manufacturing activities for the program; (iii) a $0.4 million increase in expense related to our VAC program, primarily related to manufacturing improvement activities; (iv) a $0.7 million increase in expenses related to our ANP1 program, primarily related to manufacturing activities for our allogeneic auditory neuron cell transplant program; and (v) a $0.5 million increase in expenses related to our PNC1 program, primarily related to research and development activities for our allogeneic photoreceptor cell transplant program.
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Other Income and Expenses, Net
The following table shows the amount of other income (expenses), net, during the year ended December 31, 2022 and 2021 (in thousands):
| Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Other income (expenses), net | ||||||||
| Interest income, net | $ | 829 | $ | 2 | ||||
| Gain on sale of marketable equity securities | - | 6,024 | ||||||
| Gain on extinguishment of debt | - | 523 | ||||||
| Unrealized loss on marketable equity securities | (2,194 | ) | (2,299 | ) | ||||
| Gain on revaluation of warrant liability | 225 | 205 | ||||||
| Other income (expenses), net | (2,152 | ) | 1,486 | |||||
| Total other income (expenses), net | $ | (3,292 | ) | $ | 5,941 | |||
Marketable debt securities. During the third quarter of 2022, we began to invest our excess cash in short-term U.S. Treasury securities resulting in an increase in interest income. See Note 4 (Marketable Debt Securities) to our consolidated financial statements included in this report for additional information regarding our marketable debt securities.
Marketable equity securities. We expect our total other income (expenses), net, to fluctuate each reporting period based on the changes in the market price of the common stock of OncoCyte Corporation (“OncoCyte”), which could impact our net income or loss reported in our consolidated statements of operations for a particular reporting period.
We also account for the shares we hold in Hadasit Bio-Holdings as marketable equity securities. These shares are carried at fair market value on our consolidated balance sheets. The accounting transactions for these shares were not material for either of the years ended December 31, 2022 and 2021.
See Note 5 (Marketable Equity Securities) to our consolidated financial statements included in this report for additional information regarding our marketable equity securities.
Gain on extinguishment of debt. For the year ended December 31, 2021, Lineage recognized a gain of $0.5 million on extinguishment of debt in connection with the forgiveness in full of the loan it obtained under the Paycheck Protection Program.
Other income and (expenses), net. Other expenses, net, for each of the years ended December 31, 2022 and 2021 consisted primarily of net foreign currency transaction gains and losses recognized by our subsidiaries Cell Cure and ES Cell International Pte. Ltd. Foreign currency transaction gains and losses for the periods presented are principally related to the remeasurement of the U.S. dollar denominated notes payable and notes receivable between Cell Cure and Lineage.
Income Taxes
Under ASC 740, Income Taxes, a valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. We established a full valuation allowance as of December 31, 2018 due to the uncertainty of realizing future tax benefits from the net operating loss carryforwards and other deferred tax assets, including foreign net operating losses generated by its subsidiaries.
For the year ended December 31, 2022, Lineage recorded a withholding tax for $0.5 million on interest expense deemed paid to Lineage from Cell Cure, related to the purchase of intellectual property pursuant to the US Israeli tax treaty. For the years ended December 31, 2022, and 2021, Lineage did not record a deferred tax benefit. See Note 13 (Income Taxes) for additional information.
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Liquidity and Capital Resources
Sources of Liquidity
We have historically funded our operations primarily through proceeds from the sale of shares of our common stock, the sale of common stock of our former subsidiaries, research grants, revenues from collaborations, and royalties from product sales that are unrelated to our current cell therapy product candidates. During 2022, we funded our operations primarily through (a) the $50.0 million upfront payment received under the Roche Agreement, (b) $1.6 million of proceeds from the exercise of warrants and employee stock options, and (c) $1.3 million in royalties received. During 2022, we did not raise any proceeds from research grants, sales of our common stock or from sales of common stock of our former subsidiaries.
As of December 31, 2022, $63.8 million remained available for sale under our at the market offering program and we owned marketable equity securities with a fair value of $0.4 million based on the closing price of such securities on that date. See Note 5 (Marketable Equity Securities) and Note 11 (Shareholders’ Equity) to our consolidated financial statements included in this report for additional information regarding the marketable equity securities we own and our at the market offering program, respectively. We may sell shares of our common stock and the marketable securities we own for liquidity. However, when we can effect such sales and the amount of shares we can sell depends on a variety of factors to be determined by us from time to time, including, among others, market conditions, the trading price and volume of our common stock and of the marketable securities we own. The market value of our marketable equity securities may not represent the amount that could be realized in a sale of such securities due to various market factors, including prevailing market conditions and prices at the time of any sale and subsequent sales of securities by the entities. In addition, the value of our marketable equity securities may be significantly and adversely impacted by deteriorating global economic conditions and the recent disruptions to and volatility in the credit and financial markets in the United States and worldwide resulting from the ongoing pandemics, including the COVID-19 pandemic, geopolitical conflicts, rising inflation and interest rates, and other macroeconomic factors.
Cash Flows
Cash provided by (used in) operating activities
Net cash provided by operating activities was $1.1 million for the year ended December 31, 2022, which primarily reflects the net changes in assets and liabilities of $18.7 million, plus the $5.0 million in non-cash expenses for stock-based compensation and depreciation and amortization, less the loss from operations of $22.5 million. The change in assets and liabilities was impacted by the receipt of the $50.0 million upfront payment under the Roche Agreement, and subsequent related payments to the IIA and Hadasit (see Note 14 (Commitments and Contingencies) to the consolidated financial statements included in this report for further explanation), partially offset by the accrual of the litigation settlement also as described in Note 14 (Commitments and Contingencies). The unrealized loss on marketable equity securities and foreign currency remeasurement had no effect on the cash flows.
Net cash used in operating activities of $23.6 million for the year ended December 31, 2021 primarily reflects the loss from operations of $49.2 million adjusted for the changes in assets and liabilities of $21.1 million. These items were offset primarily by non-cash expenses of $3.5 million for stock-based compensation and $0.9 million of depreciation and amortization. The unrealized loss on marketable securities, and foreign currency remeasurement are non-cash items that had no effect on cash flows.
Cash provided by (used in) investing activities
Cash used in investing activities for the year ended December 31, 2022 was $46.2 million and consisted of $53.4 million related to the purchase of U.S. Treasury securities and $0.4 million for the purchase of equipment, offset with $7.7 million in U.S. Treasuries which matured during the year.
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Cash provided by investing activities of $9.7 million for the year ended December 31, 2021 was associated primarily with receipts of $10.1 million from sales of a portion of our OncoCyte holdings, offset with the purchase of equipment for $0.4 million.
Cash provided by financing activities
Cash provided by financing activities for the year ended December 31, 2022 was $1.6 million and consisted of $1.0 million of proceeds from the exercise of warrants to purchase shares of Cell Cure and $0.6 million of proceeds from the exercise of employee stock options.
Cash provided by financing activities of $36.9 million for the year ended December 31, 2021 was associated primarily with proceeds net of financing costs of $29.8 million from the sale of common shares in at the market offerings under our Controlled Equity OfferingSM Sales Agreement with Cantor Fitzgerald & Co. and proceeds of $7.2 million from the exercise of employee stock options.
Financial Obligations
Our financial obligations primarily consist of obligations to our licensors under our in-license agreements, obligations related to grants received from government entities, including the IIA, obligations under vendor contracts to provide research services and other purchase commitments with suppliers.
The obligations under our in-license agreements require us to make future payments relating to sublicense fees, milestone fees, royalties and reimbursement of patent maintenance costs. Sublicense fees are payable to licensors when we sublicense underlying intellectual property to third parties and are based on a percentage of the license fees we receive from sublicensees. Milestone fees, including those related to the Roche Agreement, are due to licensors upon future achievement of certain commercial, development and regulatory milestones. Royalties, including those related to royalties we may receive under the Roche Agreement, are payable to licensors based on a percentage of net sales of licensed products. Reimbursement of patent maintenance costs are payable to licensors as reimbursement for the cost of maintaining license patents. Due to the contingent nature of these payments, the amounts may fluctuate significantly from period to period. As of December 31, 2022, we have not included any financial obligations under our in-license agreements in our consolidated balance sheet because the achievement and timing of the events that would require the payment of such financial obligations is not fixed and determinable.
As discussed in “Part I—Item 1. Business—Grants from Government Entities,” above, we have received grants under the Innovation Law and are required to pay royalties to the IIA from the revenues generated from the sale of product candidates and related services developed, in whole or in part pursuant to, or as a result of, a research and development program funded by the IIA. Under the Innovation Law, we are also required to pay redemption fees to the IIA. To date, through a series of separate grants beginning in 2007, Cell Cure has received a total of $15.4 million from the IIA to support the OpRegen program. We are obligated to pay approximately 24.3% of any future payments received under the Roche Agreement to the IIA, up to an aggregate cap on all payments to IIA, such cap growing over time via interest accrual until paid in full, which currently stands at approximately $91.2 million. Redemption fees due to the IIA under the Innovation Law are due upon receipt of any milestone and royalties received under the Roche Agreement. As of December 31, 2022, we have not included any future financial obligations due to the IIA under the Innovation Law in our consolidated balance sheet because the achievement and timing of the events that would require future payments to the IIA under the Innovation Law is not fixed and determinable. See Note 14 (Commitments and Contingencies) to our consolidated financial statements included in this report for additional information.
Under the terms of the leases for the facilities from which Cell Cure and Lineage operate, a total of $4.3 million of rent payments will become due, of which $1.1 million will become due in 2023.
In the normal course of business, we enter into services agreements with contract research organizations, contract manufacturing organizations and other third parties. Generally, these agreements provide for termination upon notice, with specified amounts due upon termination based on the timing of termination and the terms of the agreement. The amounts and timing of payments under these agreements are uncertain and contingent upon the initiation and completion of the services to be provided.
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Future Funding Requirements
At December 31, 2022, we had an accumulated deficit of approximately $363.4 million. We expect to continue to incur losses for at least the next several years. We expect that our operating expenses will continue to increase for the foreseeable future as we continue the development of, and seek regulatory approval for, our product candidates. As a result, we will need significant additional capital to fund our operations. Our determination as to when we will seek additional capital and the amount of additional capital that we will need will be based on our evaluation of the progress we make in our research and development programs, changes to the scope and focus of those programs, changes in grant funding for certain of those programs, and projection of future costs, revenues, and rates of expenditure. If we are unable to raise additional capital when and as needed, we may be required to delay, postpone, or cancel our clinical trials or limit the number of clinical trial sites.
We may seek to obtain the additional capital we may need through one or more equity offerings, debt financings or other third-party funding, including potential strategic alliances and licensing or collaboration agreements. We cannot assure that adequate additional capital will be available on favorable terms, if at all. The issuance of additional securities, whether equity or debt, or the possibility of such issuance, may cause the market price of our common shares to decline, and the issuance of additional equity securities could result in the dilution of the interests of our current shareholders. If we obtain additional capital through strategic alliances and licensing or collaboration agreements, we may be required to relinquish rights to our intellectual property, our product candidates or otherwise agree to terms unfavorable to us. The unavailability or inadequacy of additional capital to meet future capital needs could force us to modify, curtail, delay, or suspend some or all aspects of our current planned operations. Our ability to raise additional capital may be adversely impacted by deteriorating global economic conditions and the disruptions to and volatility in the credit and financial markets in the United States and worldwide resulting from the ongoing pandemics, including the COVID-19 pandemic, the conflict in Ukraine, rising inflation and interest rates, and other macroeconomic factors.
We believe that our $57.9 million in cash, cash equivalents and marketable securities at December 31, 2022, provide sufficient liquidity to carry out our current planned operations (including after taking into account the amount we contributed to the settlement of the litigation discussed in Note 14 (Commitments and Contingencies) to the consolidated financial statements included in this report), through at least twelve months from the issuance date of our consolidated financial statements included elsewhere in this report. We believe we will meet our longer-term expected future cash requirements and obligations with our current cash and cash equivalents, milestone and other payments we expect to receive under our collaboration agreements, and proceeds we receive from sales under our at the market offering program.
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| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Under rules and regulations of the SEC, as a smaller reporting company, we are not required to provide the information required by this item.
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| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
Index to consolidated financial statements
See accompanying notes to consolidated financial statements.
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Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Lineage Cell Therapeutics, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Lineage Cell Therapeutics, Inc. and Subsidiaries (collectively, the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, changes in shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
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Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the Audit Committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements; and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Accounting for revenue recognition
Description of the Matter
The Company recorded deferred revenue of $36.6 million as of December 31, 2022 and revenue of $13.4 million for the year ended December 31, 2022 from a collaboration agreement. As described in Note 3, the Company has concluded that the grant of licenses for the Company’s technology or programs, research and development services, and services or obligations in connection with participation in research or steering committees represent a combined performance obligation for which the Company recognizes collaboration revenues as the services are performed over time.
Auditing the Company’s accounting for revenues from this collaboration agreement was complex and required significant judgments, primarily in evaluating the period in which the performance obligation was satisfied and evaluating estimates of total expected inputs under the input method for revenue recognized over time.
How We Addressed the Matter in Our Audit
To test the measurement of efforts toward satisfying the performance obligation, our audit procedures included, among others, reviewing management’s analysis for accuracy and completeness by agreeing data to the underlying agreement, inspecting communications with the collaborative partner, evaluating the application of the input method for the recognition of revenue and testing the estimated total inputs and actual inputs incurred.
/s/
We have served as the Company’s auditor since 2014.
March 9, 2023
PCAOB
ID Number
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LINEAGE CELL THERAPEUTICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
| December 31, 2022 | December 31, 2021 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Marketable securities (Notes 4 and 5) | ||||||||
| Accounts and grants receivable, net (Note 3) | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| NONCURRENT ASSETS | ||||||||
| Property and equipment, net (Notes 6 and 14) | ||||||||
| Deposits and other long-term assets | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Lease liabilities, current portion (Note 14) | ||||||||
| Financing lease, current portion (Note 14) | ||||||||
| Deferred revenues (Note 3) | ||||||||
| Liability classified warrants, current portion | ||||||||
| Total current liabilities | ||||||||
| LONG-TERM LIABILITIES | ||||||||
| Deferred tax liability | ||||||||
| Deferred revenues, net of current portion (Note 3) | ||||||||
| Lease liability, net of current portion (Note 14) | ||||||||
| Financing lease, net of current portion (Note 14) | ||||||||
| Other long-term liabilities | ||||||||
| TOTAL LIABILITIES | ||||||||
| Commitments and contingencies (Note 14) | ||||||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Preferred shares, | ||||||||
| Common shares, | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Lineage Cell Therapeutics, Inc. shareholders’ equity | ||||||||
| Noncontrolling deficit | ( | ) | ( | ) | ||||
| Total shareholders’ equity | ||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | $ | ||||||
See accompanying notes to the consolidated financial statements.
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LINEAGE CELL THERAPEUTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
| Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| REVENUES: | ||||||||
| Collaboration revenues | $ | $ | ||||||
| Royalties | ||||||||
| Grant revenues | ||||||||
| Total revenues | ||||||||
| Cost of sales | ||||||||
| Gross profit | ||||||||
| OPERATING EXPENSES: | ||||||||
| Research and development | ||||||||
| General and administrative | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| OTHER INCOME (EXPENSES): | ||||||||
| Interest income, net | ||||||||
| Gain on sale of marketable securities | ||||||||
| Unrealized loss on marketable equity securities | ( | ) | ( | ) | ||||
| Gain on extinguishment of debt | ||||||||
| Gain on revaluation of warrant liability | ||||||||
| Other income (expense), net | ( | ) | ||||||
| Total other income/(expense) | ( | ) | ||||||
| LOSS BEFORE INCOME TAXES | ( | ) | ( | ) | ||||
| Income tax expense (Note 13) | ( | ) | ||||||
| NET LOSS | ( | ) | ( | ) | ||||
| Net loss attributable to noncontrolling interest | ||||||||
| NET LOSS ATTRIBUTABLE TO LINEAGE | $ | ( | ) | $ | ( | ) | ||
| NET LOSS PER COMMON SHARE: | ||||||||
| BASIC AND DILUTED | $ | ( | ) | $ | ( | ) | ||
| WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: | ||||||||
| BASIC AND DILUTED | ||||||||
See accompanying notes to the consolidated financial statements.
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LINEAGE CELL THERAPEUTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)
| Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| NET LOSS | $ | ( | ) | $ | ( | ) | ||
| Other comprehensive loss, net of tax: | ||||||||
| Foreign currency translation adjustments | ( | ) | ||||||
| Unrealized loss on marketable debt securities | ( | ) | ||||||
| COMPREHENSIVE LOSS | ( | ) | ( | ) | ||||
| Less: comprehensive loss attributable to noncontrolling interest | ||||||||
| COMPREHENSIVE LOSS ATTRIBUTABLE TO LINEAGE COMMON SHAREHOLDERS | $ | ( | ) | $ | ( | ) | ||
See accompanying notes to the consolidated financial statements.
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LINEAGE CELL THERAPEUTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(IN THOUSANDS)
| Preferred Shares | Common Shares | Noncontrolling | Accumulated
Other | Total | ||||||||||||||||||||||||||||
| Number of Shares | Amount | Number of Shares | Amount | Accumulated Deficit | Interest/ (Deficit) | Comprehensive Income/(Loss) | Shareholders’ Equity | |||||||||||||||||||||||||
| BALANCE AT DECEMBER 31, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||
| Shares issued through ATM | ||||||||||||||||||||||||||||||||
| Shares issued upon vesting of restricted stock units, net of shares retired to pay employees’ taxes | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Shares issued for services | ||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||||||
| Shares issued upon exercise of stock options | ||||||||||||||||||||||||||||||||
| Financing related fees | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Shares issued for retirement of stock warrants | ||||||||||||||||||||||||||||||||
| Foreign currency translation loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| NET LOSS | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| BALANCE AT DECEMBER 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||
| Balance | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||
| Shares issued upon vesting of restricted stock units, net of shares retired to pay employees’ taxes | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||||||
| Shares issued upon exercise of stock options | ||||||||||||||||||||||||||||||||
| Subsidiary warrant exercise, net | - | - | ||||||||||||||||||||||||||||||
| Unrealized loss on marketable securities | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Foreign currency translation gain | - | - | ||||||||||||||||||||||||||||||
| NET LOSS | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| BALANCE AT DECEMBER 31, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||
| Balance | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||
See accompanying notes to the consolidated financial statements.
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LINEAGE CELL THERAPEUTICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
| Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss attributable to Lineage | $ | ( | ) | $ | ( | ) | ||
| Net loss attributable to noncontrolling interest | ( | ) | ( | ) | ||||
| Adjustments to reconcile net loss attributable to Lineage to net cash used in operating activities: | ||||||||
| Gain on sale of marketable equity securities | ( | ) | ||||||
| Unrealized loss on marketable equity securities | ||||||||
| Accretion of income on marketable debt securities | ( | ) | ||||||
| Depreciation expense, including amortization of leasehold improvements | ||||||||
| Change in right-of-use assets and liabilities | ( | ) | ||||||
| Amortization of intangible assets | ||||||||
| Stock-based compensation | ||||||||
| Common stock issued for services | ||||||||
| Gain on revaluation of warrant liability | ( | ) | ( | ) | ||||
| Foreign currency remeasurement and other loss/(gain) | ( | ) | ||||||
| Loss/(gain) on sale of assets | ( | ) | ||||||
| Gain on extinguishment of debt | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts and grants receivable (Note 3) | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Accounts payable and accrued liabilities (Note 8) | ( | ) | ||||||
| Deferred revenue and other liabilities (Note 3) | ( | ) | ||||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchases of marketable debt securities | ( | ) | ||||||
| Maturities of marketable debt securities | ||||||||
| Purchases of property and equipment, net | ( | ) | ( | ) | ||||
| Proceeds from sale of OncoCyte common shares | ||||||||
| Proceeds from the sale of HBL common shares | ||||||||
| Net cash (used in) provided by investing activities | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from employee options exercised | ||||||||
| Common shares received and retired for employee taxes paid | ( | ) | ( | ) | ||||
| Proceeds from sale of common shares | ||||||||
| Proceeds from exercise of subsidiary warrants, net | ||||||||
| Repayments of financing lease liabilities | ( | ) | ( | ) | ||||
| Payments for offering costs | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | ( | ) | ( | ) | ||||
| NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | ( | ) | ||||||
| At beginning of year | ||||||||
| At end of year | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid during year for interest | $ | $ | ||||||
| SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING AND INVESTING ACTIVITIES: | ||||||||
| Receivable from sale of common shares in at the market offering | $ | $ | ||||||
| Receivable from exercise of stock options | $ | $ | ||||||
See accompanying notes to the consolidated financial statements.
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LINEAGE CELL THERAPEUTICS, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Organization, Basis of Presentation and Liquidity
We are a clinical-stage biotechnology company developing novel cell therapies to address unmet medical needs. Our programs are based on our proprietary cell-based technology platform and associated development and manufacturing capabilities. From this platform, we design, develop, manufacture, and test specialized human cells with anatomical and physiological functions similar to, or identical to, cells found naturally in the human body. Cells which we manufacture are created by specific developmental biological differentiation protocols that we apply to established, well-characterized, and self-renewing pluripotent cell lines. These cells are transplanted into patients and are designed to (a) replace or support cells that are absent or dysfunctional due to degenerative disease, aging, or traumatic injury, and (b) restore or augment functional activity in the affected person.
Our
strategy is to efficiently leverage our technology platform and our development, formulation, delivery, and manufacturing capabilities
to advance our programs internally, or in conjunction with strategic partners, to further enhance their value and probability of success.
As one example, in December 2021 we entered into a Collaboration and License Agreement with F. Hoffmann-La Roche Ltd and Genentech, Inc.,
a member of the Roche Group, wherein we granted to Roche exclusive worldwide rights to develop and commercialize retinal pigment epithelium
cell therapies, including our proprietary cell therapy program known as OpRegen®, for the treatment of ocular disorders,
including geographic atrophy (GA) secondary to age-related macular degeneration (AMD). Under the terms of the Roche Agreement, Lineage
received a $
As of December 31, 2022, we have five allogeneic, or “off-the-shelf,” cell therapy programs in development, of which three have reached clinical testing:
Product Candidates
| ● | OpRegen®, an allogeneic retinal pigment epithelium cell replacement therapy currently in a Phase 2a multicenter clinical trial, being conducted by Genentech, for the treatment of geographic atrophy (GA) secondary to age-related macular degeneration (AMD), also known as atrophic or dry AMD. A previous Phase 1/2a trial conducted by Lineage enrolled twenty-four (24) individuals with dry AMD with GA. In December 2021, this program was partnered with Roche for further clinical development and commercialization. | |
| ● | OPC1,
an allogeneic oligodendrocyte progenitor cell therapy currently in long-term follow-up from a Phase 1/2a multicenter clinical trial
for cervical spinal cord injuries. To date, five (5) patients with thoracic spinal cord injuries and twenty-five (25) patients with
cervical spinal cord injuries have been enrolled in clinical trials of OPC1. The clinical development of OPC1 has been partially
funded by $ | |
| ● | VAC, an allogeneic cancer immunotherapy comprised of antigen-presenting dendritic cells. One of the VAC product candidates, VAC2, is currently in a Phase 1 clinical trial in non-small cell lung cancer. This clinical trial is being funded and conducted by Cancer Research UK, one of the world’s largest independent cancer research charities. An additional VAC-based product candidate is in preclinical development with our partner, Immunomic Therapeutics, Inc., for the treatment of glioblastoma multiforme.
| |
| ● | ANP1, an allogeneic auditory neuron progenitor cell transplant currently in preclinical development for the treatment of debilitating hearing loss. | |
| ● | PNC1, an allogeneic photoreceptor cell transplant currently in preclinical development for the treatment of vision loss due to photoreceptor dysfunction or damage. |
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Other Programs
We have additional undisclosed product candidates being considered for development, which cover a range of therapeutic areas and unmet medical needs. Generally, these product candidates are based on the same platform technology and employ a similar guided cell differentiation and transplant approach as the product candidates detailed above, but in some cases may also include genetic modifications designed to enhance efficacy and/or safety profiles.
In addition to seeking to create value for shareholders by developing product candidates and advancing those candidates through clinical development, we also may seek to create value from our large patent estate and additional related technologies and capabilities, through partnering and/or strategic transactions.
Use of estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period with consideration given to materiality. Significant estimates and assumptions which are subject to significant judgment include those related to going concern assessment of consolidated financial statements, useful lives associated with long-lived assets, including evaluation of asset impairment, allowances for uncollectible accounts receivables, loss contingencies, deferred income taxes and tax reserves, including valuation allowances related to deferred income taxes, and assumptions used to value stock-based awards, debt or other equity instruments. Actual results could differ materially from those estimates.
Principles of consolidation
Lineage’s consolidated financial statements include the accounts of its subsidiaries. The following table reflects Lineage’s ownership, directly or through one or more subsidiaries of the outstanding shares of its operating subsidiaries as of December 31, 2022.
Schedule of Lineage’s Ownership of Outstanding Shares of its Subsidiaries
| Subsidiary | Field of Business | Lineage Ownership | Country | |||||
| Cell Cure Neurosciences Ltd | %(1)(2) | Israel | ||||||
| ES Cell International Pte. Ltd. | % | Singapore | ||||||
| (1) | |
| (2) |
All material intercompany accounts and transactions have been eliminated in consolidation. As of December 31, 2022, Lineage consolidated its direct and indirect wholly owned or majority-owned subsidiaries because Lineage has the ability to control their operating and financial decisions and policies through its ownership, and the noncontrolling interest is reflected as a separate element of shareholders’ equity on Lineage’s consolidated balance sheets.
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Liquidity
On
December 31, 2022, we had $
Capital Resources
Since inception, we have incurred significant operating losses and have funded our operations primarily through the issuance of equity securities, the sale of common stock of our former subsidiaries, receipt of proceeds from research grants, revenues from collaborations, and royalties from product sales.
As
of December 31, 2022, $
We may use our marketable securities for liquidity as necessary and as market conditions allow. The market value of our marketable securities may not represent the amount that could be realized in a sale of such securities due to various market and regulatory factors, including trading volume, prevailing market conditions and prices at the time of any sale and subsequent sales of securities by the entities. In addition, the value of our marketable equity securities may be significantly and adversely impacted by deteriorating global economic conditions and the recent disruptions to and volatility in the credit and financial markets in the United States and worldwide resulting from the ongoing pandemics, including the COVID-19 pandemic, geopolitical conflicts, rising inflation and interest rates, and other macroeconomic factors.
Additional Capital Requirements
Our financial obligations primarily consist of vendor contracts to provide research services and other purchase commitments with suppliers. In the normal course of business, we enter into services agreements with contract research organizations, contract manufacturing organizations and other third parties. Generally, these agreements provide for termination upon notice, with specified amounts due upon termination based on the timing of termination and the terms of the agreement. The amounts and timing of payments under these agreements are uncertain and contingent upon the initiation and completion of the services to be provided.
Our commitments include obligations to our licensors under our in-license agreements, and obligations related to grants received from government entities. These obligations may require us to make future payments relating to sublicense fees, milestone fees, redemption fees, royalties and reimbursement of patent maintenance costs. Sublicense fees are payable to licensors when we sublicense underlying intellectual property to third parties; the fees are based on a percentage of the license fees we receive from sublicensees. Milestone payments are due to licensors upon our future achievement of certain development and regulatory milestones. Royalties are payable to licensors based on a percentage of net sales of licensed products. Patent maintenance costs are payable to licensors as reimbursement for the cost of maintaining license patents. Due to the contingent nature of these payments, the amounts may fluctuate significantly from period to period. As of December 31, 2022, we have not included these commitments on our consolidated balance sheet because the achievement and timing of these events is not fixed and determinable.
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2. Significant Accounting Policies
Marketable Debt Securities - Lineage accounts for its holdings of U.S. Treasury securities in accordance with Accounting Standards Codification (“ASC”) 320-10-50, Debt Securities. All marketable debt securities have been classified as “available-for-sale” and are carried at estimated fair value. Unrealized gains and losses are excluded from earnings and are included in other comprehensive income or loss and reported as a separate component of stockholders’ equity or deficit until realized. Realized gains or losses on available-for-sale debt securities are included in other income (expense), net. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion, together with interest on securities, are included in interest income on the Company’s consolidated statement of operations. In accordance with the Company’s investment policy, management invests in debt securities with high credit quality, including U.S. government securities.
Lineage reviews all its investments for other-than-temporary declines in estimated fair value. Our review includes the consideration of the cause of the impairment, including the creditworthiness of the security issuers, the number of securities in an unrealized loss position, the severity and duration of the unrealized losses, whether the Company has the intent to sell the security. If a credit loss does exist for available-for-sale debt securities and should be recognized, an allowance will be recorded rather than a write-down to the amortized costs basis. To date, no such credit losses have occurred or have been recorded. See Note 4 (Marketable Debt Securities) for additional information.
Marketable equity securities - Lineage accounts for the shares it holds in OncoCyte and HBL as marketable equity securities in accordance with ASC 320-10-25, Investments – Debt and Equity Securities, as amended by Accounting Standards Update (“ASU”) 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, further discussed below.
OncoCyte shares have readily determinable fair values quoted on the NYSE American under trading symbol “OCX”. The HBL shares have a readily determinable fair value quoted on the Tel Aviv Stock Exchange (“TASE”) under the trading symbol “HDST” where share prices are denominated in New Israeli Shekels (NIS).
Revenue recognition - Lineage recognizes revenue in accordance with Financial Accounting Standards Board (“FASB”) ASU 2014-09, Revenues from Contracts with Customers (Topic 606), and in a manner that depicts the transfer of control of a product or a service to a customer and reflects the amount of the consideration it is entitled to receive in exchange for such product or service. In doing so, Lineage follows a five-step approach: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations; and (v) recognize revenue when (or as) the customer obtains control of the product or service. Lineage considers the terms of a contract and all relevant facts and circumstances when applying the revenue recognition standard. Lineage applies the revenue recognition standard, including the use of any practical expedients, consistently to contracts with similar characteristics and in similar circumstances.
Royalties from product sales and license fees - For agreements that include sales-based royalties, including commercial milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, Lineage recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). Lineage estimates and recognizes royalty revenues based on all available information, including estimates provided by the customer or licensee from which Lineage obtains such estimates directly for each reporting period. Actual revenues ultimately received may differ from those estimates recorded and are adjusted in the period when information to actuals is available to Lineage.
Collaborative
agreements - In December 2021, Lineage entered into the Roche Agreement for the development and commercialization of OpRegen. Under
the terms of the Roche Agreement, Roche agreed to pay Lineage a $
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In
April 2021, Lineage entered a worldwide license and collaboration agreement with Immunomic Therapeutics, Inc. for the development
and commercialization of an allogeneic version of an immunomic oncology target utilizing the VAC platform. Under the terms of this
agreement, Lineage is entitled to upfront licensing fees totaling up to $
As
of December 31, 2022, we recorded $
We review collaborative agreements to determine if the accounting treatment falls under Accounting Standards Codification, Topic 606, Revenue from Contracts with Customers (“ASC 606”), or Accounting Standards Codification Topic 808, Collaborative Arrangements (“ASC 808”). While these agreements may be within the scope of ASC 808, we may analogize to ASC 606 for some aspects of the agreements.
The terms of our collaborative agreements typically include one or more of the following: (i) upfront fees; (ii) milestone payments related to achievement of development or commercial milestones; (iii) royalties on net sales of licensed products; and (iv) reimbursement of cost-sharing of research and development (“R&D”) expenses. Each of these payments eventually result in collaboration revenues. When a portion of non-refundable upfront fees or other payments received are allocated to continuing performance obligations under the terms of a collaborative agreement, they are recorded as deferred revenue and recognized as collaboration revenue when (or as) the underlying performance obligation is satisfied.
To identify the performance obligations within the collaboration agreements, we first identify all the promises in the contract (i.e., explicit and implicit), which may include a customer option to acquire additional goods or services for free or at a discount. We exclude any immaterial promises from the assessment of identifying performance obligations. When an option is identified as providing a customer with a material right, the option is identified as a performance obligation. A portion of the transaction price is then allocated to the option and recognized when (or as) the future goods or services related to the option are provided, or when the option expires.
As part of the accounting treatment for these agreements, we must develop estimates and assumptions that require judgement to determine the underlying stand-alone selling price for each performance obligation which determines how the transaction price is allocated among the performance obligations. The following items are estimated in the calculation of the stand-alone selling price: forecasted revenues and development costs, development timelines, discount rates and probabilities of technical and regulatory success. We evaluate each performance obligation to determine if they can be satisfied at a point in time or over time, and we measure the services delivered to our collaboration partners each reporting period, which is based on the progress of the related program. If necessary, we adjust the measure of performance and related revenue recognition. Any such adjustments are recorded on a cumulative catch-up basis which would affect revenue and net income (loss) in the period of adjustment. In addition, variable considerations (e.g., milestone payments) must be evaluated to determine if it is constrained and, therefore, excluded from the transaction price.
Upfront fees - If a license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize collaboration revenues from the transaction price allocated to the license when the license is transferred to the licensee, and the licensee is able to use and benefit from the license. When the license is determined to be non-distinct, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time, and, if over time, the appropriate method of measuring progress for purposes of recognizing collaboration revenue from the allocated transaction price. For example, when we receive upfront fees for the performance of research and development services, or when research and development services are not considered to be distinct from a license, we recognize collaboration revenue for those units of account over time using a measure of progress. We evaluate the measure of progress at each reporting period and, if necessary, adjust the measure of performance and related revenue as a change in estimate.
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Milestone payments - At the inception of each collaboration agreement that includes milestone payments (variable consideration), we evaluate whether the milestones are considered probable of being reached and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our or the collaboration partner’s control, such as non-operational developmental and regulatory approvals, are generally not considered probable of being achieved until those approvals are received. At the end of each reporting period, we re-evaluate the probability of achievement of milestones that are within our or the collaboration partner’s control, such as operational developmental milestones and any related constraint, and if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect collaboration revenues and net income (loss) in the period of adjustment. Revisions to our estimate of the transaction price may also result in negative collaboration revenues and net income (loss) in the period of adjustment.
Royalties - For collaboration agreements that include sales-based royalties, including commercial milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, we recognize revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).
Reimbursement, cost-sharing payments - Under certain collaborative agreements, we will receive reimbursement for a portion of our R&D expenses. Such reimbursements are reviewed for gross versus net reporting considerations and reflected either as a reduction of R&D expense or as reimbursement revenue in our consolidated statements of operations.
For the years ended December 31, 2022 and 2021, respectively, Lineage reported a net loss attributable to common shareholders, and therefore, all potentially dilutive common shares were considered antidilutive for those periods.
Schedule of Anti-dilutive Securities Excluded from Computation of Earnings Per Share
| Years Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Stock options | ||||||||
| Restricted stock units | ||||||||
Restricted cash - In accordance with ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, Lineage explains the change during the period in the total of cash, cash equivalents and restricted cash, and includes restricted cash with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the consolidated statements of cash flows.
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The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheet dates that comprise the total of the same such amounts shown in the consolidated statements of cash flows for all periods presented herein (in thousands):
Schedule of Reconciliation of Cash, Cash Equivalents, and Restricted Cash
| December 31, 2022 | December 31, 2021 | |||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash included in long-term assets (see Note 14 (Commitments and Contingencies)) | ||||||||
| Total cash, cash equivalents, and restricted cash as shown in the consolidated statements of cash flows | $ | $ | ||||||
Accounts
and grants receivable, net – Net accounts receivables amounted to $
Leases - We account for leases in accordance with ASC 842, Leases. We determine if an arrangement is a lease at inception. Leases are classified as either financing or operating, with classification affecting the pattern of expense recognition in the consolidated statements of operations. Under the available practical expedients for the adoption of ASC 842, we account for the lease and non-lease components as a single lease component. We recognize right-of-use (“ROU”) assets and lease liabilities for leases with terms greater than twelve months in the consolidated balance sheet. ROU assets represent our right to use an underlying asset during the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating and finance lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The operating and finance lease ROU assets also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. Lease expense for finance lease payments is recognized as amortization of ROU assets and related interest. Operating and finance leases are included as assets in property and equipment; finance and lease liabilities are included in the current and long-term liabilities in the consolidated balance sheets.
Goodwill and IPR&D – Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed. Goodwill is tested for impairment in accordance with ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. In-process research and development (“IPR&D”) assets are indefinite-lived intangible assets until the completion or abandonment of the associated research and development (“R&D”) efforts. Once the R&D efforts are completed or abandoned, the IPR&D will either be amortized over the asset’s estimated life as a finite-lived intangible asset or be impaired, respectively, in accordance with ASC 350, Intangibles – Goodwill and Other. In accordance with ASC 350, goodwill and acquired IPR&D are determined to have indefinite lives and, therefore, are not amortized. Instead, they are tested for impairment at least annually and between annual tests if we become aware of an event or a change in circumstances that would indicate the asset may be impaired.
Going concern assessment – Lineage assesses going concern uncertainty for its consolidated financial statements to determine if Lineage has sufficient cash and cash equivalents on hand and working capital to operate for a period of at least one year from the date the consolidated financial statements are issued or are available to be issued, which is referred to as the “look-forward period” as defined by FASB’s ASU No. 2014-15. As part of this assessment, based on conditions that are known and reasonably knowable to Lineage, Lineage will consider various scenarios, forecasts, projections, and estimates, and Lineage will make certain key assumptions, including the timing and nature of projected cash expenditures or programs, and its ability to delay or curtail those expenditures or programs, if necessary, among other factors. Based on this assessment, as necessary or applicable, Lineage makes certain assumptions concerning its ability to curtail or delay research and development programs and expenditures within the look-forward period in accordance with ASU No. 2014-15.
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Cash
and cash equivalents – Lineage considers all highly liquid investments purchased with an original maturity of three months
or less to be cash equivalents. As of December 31, 2022 and 2021, Lineage had $
Concentrations of credit risk and significant sources of supply – Financial instruments that potentially subject Lineage to significant concentrations of credit risk consist primarily of cash, cash equivalents and marketable debt securities. Lineage limits the amount of credit exposure of cash balances by maintaining its accounts in high credit quality financial institutions. Cash equivalent deposits with financial institutions may occasionally exceed the limits of insurance on bank deposits; however, Lineage has not experienced any losses on such accounts. Lineage mitigates its credit exposure on marketable debt securities by investing in short term U.S. Treasuries securities.
Lineage relies on single-source, third-party suppliers for a few key components of our product candidates. If these single-source, third-party suppliers are unable to continue providing a key component, the initiation or progress of any clinical studies of its product candidates may be impeded.
Property
and equipment, net – Property and equipment is stated at cost and is being depreciated using the straight-line method over
their estimated useful lives ranging from
Long-lived
intangible assets – Long-lived intangible assets, consisting primarily of acquired patents, patent applications, and licenses
to use certain patents are stated at acquired cost, less accumulated amortization. Amortization expense is computed using the straight-line
method over the estimated useful lives of the assets, generally over
Impairment of long-lived assets – Long-lived assets, including long-lived intangible assets, are reviewed annually for impairment and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If an impairment indicator is present, Lineage evaluates recoverability by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. If the assets are impaired, the impairment recognized is measured by the amount by which the carrying amount exceeds the estimated fair value of the assets.
Accounting for warrants – Lineage determines the accounting classification of warrants that it or its subsidiaries issue, as either liability or equity, by first assessing whether the warrants meet liability classification in accordance with ASC 480-10, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, and then in accordance with ASC 815-40, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. Under ASC 480-10, warrants are considered liability classified if the warrants are mandatorily redeemable, obligate the issuer to settle the warrants or the underlying shares by paying cash or other assets, or warrants that must or may require settlement by issuing variable number of shares. If warrants do not meet liability classification under ASC 480-10, Lineage assesses the requirements under ASC 815-40, which states that contracts that require or may require the issuer to settle the contract for cash are liabilities recorded at fair value, irrespective of the likelihood of the transaction occurring that triggers the net cash settlement feature. If the warrants do not require liability classification under ASC 815-40, in order to conclude equity classification, Lineage assesses whether the warrants are indexed to its common stock or its subsidiary’s common stock, as applicable, and whether the warrants are classified as equity under ASC 815-40 or other applicable GAAP. After all relevant assessments are made, Lineage concludes whether the warrants are classified as liability or equity. Liability classified warrants are required to be accounted for at fair value both on the date of issuance and on subsequent accounting period ending dates, with all changes in fair value after the issuance date recorded in the consolidated statements of operations as a gain or loss. Equity classified warrants are accounted for at fair value on the issuance date with no changes in fair value recognized subsequent to the issuance date.
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Transactions with noncontrolling interests of subsidiaries - Lineage accounts for a change in ownership interests in its subsidiaries that does not result in a change of control of the subsidiary by Lineage under the provisions of ASC 810-10-45-23, Consolidation – Other Presentation Matters, which prescribes the accounting for changes in ownership interest that do not result in a change in control of the subsidiary, as defined by GAAP, before and after the transaction. Under this guidance, changes in a controlling shareholder’s ownership interest that do not result in a change of control, as defined by GAAP, in the subsidiary are accounted for as equity transactions. Thus, if the controlling shareholder retains control, no gain or loss is recognized in the statements of operations of the controlling shareholder. Similarly, the controlling shareholder will not record any additional acquisition adjustments to reflect its subsequent purchases of additional shares in the subsidiary if there is no change of control. Only a proportional and immediate transfer of carrying value between the controlling and the noncontrolling shareholders occurs based on the respective ownership percentages.
Research and development expenses - Research and development expenses consist of costs incurred for company-sponsored, collaborative and contracted research and development activities. These costs include direct and research-related overhead expenses including compensation and related benefits, stock-based compensation, consulting fees, research and laboratory fees, rent of research facilities, amortization of intangible assets, and license fees paid to third parties to acquire patents or licenses to use patents and other technology. Research and development costs which have an alternative future use will be capitalized as tangible assets, and costs with no future benefit or alternative use will be expensed as incurred. Research and development expenses incurred and reimbursed by grants from third parties approximate the grant income recognized in the consolidated statements of operations. Royalty expenses or sublicensing fees are recorded as research and development costs, unless these costs are associated with royalties from product sales, which we classify as cost of sales on our consolidated statements of operations.
General and administrative expenses - General and administrative expenses consist of employee and director compensation and related benefits, including stock-based compensation, for executive and corporate personnel; professional and consulting fees; and allocated overhead such as facilities rent and equipment rent and maintenance, insurance costs allocated to general and administrative expenses, costs of patent applications, prosecution and maintenance, stock exchange-related costs, depreciation expense, marketing costs, and other miscellaneous expenses.
Foreign
currency translation adjustments and other comprehensive income or loss - In countries in which Lineage operates where the functional
currency is other than the U.S. dollar, assets and liabilities are translated using published exchange rates in effect at the consolidated
balance sheet date. Revenues and expenses and cash flows are translated using an approximate weighted average exchange rate for the period.
Resulting foreign currency translation adjustments are recorded as other comprehensive income or loss, net of tax, in the consolidated
statements of comprehensive income or loss and included as a component of accumulated other comprehensive income or loss on the consolidated
balance sheets. Foreign currency translation adjustments are primarily attributable to Cell Cure and ESI, Lineage’s consolidated
foreign subsidiaries. For the years ended December 31, 2022, comprehensive gain includes foreign currency translation adjustments, net
of tax, of $
Foreign currency transaction gains and losses - For transactions denominated in other than the functional currency of Lineage or its subsidiaries, Lineage recognizes transaction gains and losses in the consolidated statements of operations and classifies the gain or loss based on the nature of the item that generated it. The majority of Lineage’s foreign currency transaction gains and losses are generated by Cell Cure’s intercompany debt due to Lineage, which are U.S. dollar-denominated, while Cell Cure’s functional currency is the Israeli New Shekel (“ILS”). At each balance sheet date, Lineage remeasures the intercompany debt using the current exchange rate at that date pursuant to ASC 830, Foreign Currency Matters. These foreign currency remeasurement gains and losses are included in other income and expenses, net.
Income taxes - Lineage accounts for income taxes in accordance with ASC 740, Income Taxes, which prescribe the use of the asset and liability method, whereby deferred tax asset or liability account balances are calculated at the balance sheet date using current tax laws and rates in effect. Valuation allowances are established when necessary to reduce deferred tax assets when it is more likely than not that a portion or all of the deferred tax assets will not be realized. ASC 740 guidance also prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For benefits to be recognized, a tax position must be more-likely-than-not sustainable upon examination by taxing authorities. Lineage files a U.S. federal income tax return as well as various state and foreign income tax returns. Lineage’s judgments regarding future taxable income may change over time due to changes in market conditions, changes in tax laws, tax planning strategies or other factors. If Lineage assumptions, and consequently the estimates, change in the future with respect to Lineage’s own deferred tax assets and liabilities, the valuation allowance may be increased or decreased, which may have a material impact on Lineage’s consolidated financial statements. Lineage recognizes accrued interest and penalties related to unrecognized tax benefits, if any, as income tax expense; however, no amounts were accrued for the payment of interest and penalties as of December 31, 2022 and 2021.
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On December 22, 2017, the United States enacted major federal tax reform legislation, Public Law No. 115-97, commonly referred to as the 2017 Tax Cuts and Jobs Act (“2017 Tax Act”), which enacted a broad range of changes to the Internal Revenue Code. Beginning in 2018, the 2017 Tax Act subjects a U.S. stockholder to tax on Global Intangible Low Tax Income (“GILTI”) earned by certain foreign subsidiaries. In general, GILTI is the excess of a U.S. shareholder’s total net foreign income over a deemed return on tangible assets. The provision further allows a deduction of 50% of GILTI, however this deduction is limited to the Company’s pre-GILTI U.S. income. See Note 13 (Income Taxes) for additional information.
Current interpretations under ASC 740 state that an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense. We have elected to account for GILTI as a current period expense when incurred.
For employee and director stock options, we utilize the Black-Scholes option pricing model for valuing share-based payment awards. Lineage’s determination of fair value of share-based payment awards on the date of grant using that option-pricing model is affected by the price of Lineage’s common shares as well as by assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, expected stock price volatility over the term of the awards, and the expected term of options granted, which is derived using the simplified method, which is an average of the contractual term of the option and its vesting period, as we do not have sufficient historical exercise data upon which to estimate expected term. The risk-free rate is based on the U.S. Treasury yield in effect at the time of grant for U.S. Treasury notes with maturities similar to the expected term of the awards. Stock option forfeitures are accounted for as they occur.
For restricted stock unit awards (“RSUs”) subject to service and/or performance vesting conditions, the grant-date fair value is established based on the closing price of Lineage’s common shares on such date. Stock-based compensation expense for RSUs subject to only service conditions is recognized on a straight-line basis over the service period. Stock-based compensation expense for RSUs with both service and performance conditions is recognized on a graded basis only if it is probable that the performance condition will be achieved. Lineage accounts for forfeitures of RSUs as they occur in determining stock-based compensation expense. For RSUs subject to a market condition, the grant-date fair value is estimated using a Monte Carlo valuation model. The model is based on random projections of stock price paths and must be repeated numerous times to achieve a probabilistic assessment. Lineage recognizes stock-based compensation expense for RSUs subject to market-based vesting conditions regardless of whether it becomes probable that the vesting conditions will be achieved, and stock-based compensation expense for such RSUs is not reversed if vesting does not actually occur.
Although the fair value of employee stock options and RSUs are determined in accordance with FASB guidance, changes in the assumptions can materially affect the estimated value and therefore the amount of compensation expense recognized in the consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted - The following accounting standards, which are not yet effective, are presently being evaluated by Lineage to determine the impact that they might have on its consolidated financial statements.
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In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for Lineage beginning January 1, 2023. The Company plans to adopt ASU 2016-13, effective January 1, 2023, and does not anticipate this will have a material effect on the Company’s consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional guidance for a limited period of time to ease the burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. This would apply to companies meeting certain criteria that have contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This standard is effective for us immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. During 2022, the FASB. issued ASU 2022-06 Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. This ASU extended the sunset date of Topic 848 to December 31, 2024. We are currently assessing the impact the new guidance will have on our consolidated financial statements and disclosures.
3. Revenue
Our disaggregated revenues were as follows (in thousands):
Schedule of Disaggregated Revenues
| Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Royalties | $ | $ | ||||||
| Grant revenues | ||||||||
| Israel Innovation Authority (“IIA”) | $ | $ | ||||||
| Total grant revenues | ||||||||
| Revenues under collaborative agreements | ||||||||
| Upfront license fees | ||||||||
| Event-based development milestones | ||||||||
| Reimbursements, cost-sharing payments | ||||||||
| Total revenues under collaborative agreements | ||||||||
| Total revenue | $ | $ | ||||||
During
the year ended December 31, 2022 we recognized $
During
the year ended December 31, 2021 we recognized $
We
are recognizing the $
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Accounts receivable and other receivable, net, and deferred revenues (contract liabilities) from contracts with customers, including collaboration partners, consisted of the following (in thousands):
Schedule of Contract with Customer Contract Liability and Receivable
December 31, 2022 | December 31, 2021 | |||||||
| Accounts receivable and other receivable, net (1)(2)(3) | $ | $ | ||||||
| Deferred revenues (1)(2)(3) | ||||||||
| (1) | ||
| (2) | ||
| (3) |
As
of December 31, 2022, the amounts in the transaction price of our contracts with customers, including collaboration partners, and allocated
goods and services not yet provided were $
The following table presents amounts under our collaboration agreements included in the transaction price (i.e., cumulative amounts triggered or probable) as of December 31, 2022 (in thousands):
Schedule of Collaboration Agreements
| Upfront(1) | Development(2) | Reimbursements(3) | Total | |||||||||||||
| Collaboration partner and agreement date: | ||||||||||||||||
| ITI (April 2021)(4) | $ | $ | $ | $ | ||||||||||||
| Roche (December 2021)(5) | ||||||||||||||||
| Total amounts under our collaboration agreements included in the transaction price | $ | $ | $ | $ | ||||||||||||
| (1) |
| (2) |
| (3) | |
| (4) | |
| (5) |
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4. Marketable Debt Securities
The following table is a summary of available-for-sale debt securities in cash and cash equivalents or marketable securities in the Company’s consolidated balance sheet as of December 31, 2022 (in thousands):
Summary of Available for Sale Debt Securities
December 31, 2022 | ||||||||||||||||
| Financial Assets: | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||
| U.S. Treasury securities | $ | $ | | $ | ( | ) | $ | |||||||||
| Total | ( | ) | ||||||||||||||
The Company has not recognized an allowance for credit losses on any securities in an unrealized loss position as of December 31, 2022. We believe that the individual unrealized losses represent temporary declines resulting from changes in interest rates, and we intend to hold these marketable securities to their maturity.
As of December 31, 2022, the amortized cost and estimated fair value of the Company’s available-for-sale debt securities by contractual maturity are shown below (in thousands):
Schedule of Amortized cost And Estimated fair Value
Amortized Cost | Estimated Fair Value | |||||||
| Available-for-sale debt securities maturing: | ||||||||
| In one year or less | $ | $ | ||||||
| Total available-for-sale debt securities | ||||||||
The Company currently does not intend to sell these securities prior to maturity and does not consider these investments to be other-than-temporarily impaired at December 31, 2022.
As of December 31, 2022 we did not have any marketable debt securities which were classified as cash equivalents on the consolidated balance sheet. As of December 31, 2021 the Company did not have any marketable debt securities.
5. Marketable Equity Securities
As
of December 31, 2022, Lineage owned approximately million shares of OncoCyte common stock. These shares had a fair value of approximately
$
For
the year ended December 31, 2022, Lineage recorded a net unrealized loss on marketable equity securities of $
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All share prices are determined based on the closing price of OncoCyte common stock under the trading symbol (“OCX”) on the NYSE American on the applicable dates, for the last day of trading of the applicable quarter, if the last day of a quarter fell on a weekend.
We account for the shares we hold in HBL as marketable equity securities as of December 31, 2022. These securities were carried at fair market value on our consolidated balance sheets, and the accounting transactions for the years ended December 31, 2022 and 2021 were not material.
6. Property and Equipment, Net
At December 31, 2022 and 2021, property and equipment, net were comprised of the following (in thousands):
Schedule of Property and Equipment, Net
| 2022 | 2021 | |||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Equipment, furniture and fixtures | $ | $ | ||||||
| Leasehold improvements | ||||||||
| Right-of-use assets | ||||||||
| Accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Property
and equipment for financing leases was $
Depreciation
and amortization expense amounted to $
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7. Goodwill and Intangible Assets, Net
At December 31, 2022 and 2021, goodwill and intangible assets, net consisted of the following (in thousands):
Schedule of Goodwill and Intangible Assets Net
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Goodwill (1) | $ | $ | ||||||
| Intangible assets: | ||||||||
| Acquired IPR&D – OPC1 (from the Asterias Merger) (2) | $ | $ | ||||||
| Acquired IPR&D – VAC2 (from the Asterias Merger) (2) | ||||||||
| Intangible assets subject to amortization: | ||||||||
| Acquired patents | ||||||||
| Acquired royalty contracts (3) | ||||||||
| Total intangible assets | ||||||||
| Accumulated amortization (4) | ( | ) | ( | ) | ||||
| Intangible assets, net | $ | $ | ||||||
| (1) | |
| (2) |
|
| (3) |
|
| (4) |
Lineage
amortizes its intangible assets over an estimated period of
Amortization of intangible assets for periods subsequent to December 31, 2022 is as follows (in thousands):
Schedule of Intangible Assets Future Amortization Expenses
| Year Ended December 31, | Amortization Expense | |||
| 2023 | $ | | ||
| 2024 | ||||
| Total | $ | |||
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8. Accounts Payable and Accrued Liabilities
At December 31, 2022 and 2021, accounts payable and accrued liabilities consist of the following (in thousands):
Schedule of Accounts Payable and Accrued Liabilities
| 2022 | 2021 | |||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Accounts payable | $ | $ | ||||||
| Accrued compensation | ||||||||
| Accrued liabilities (1) | ||||||||
| Other current liabilities | ||||||||
| Total | $ | $ | ||||||
| (1) |
9. Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value (ASC 820-10-50), Fair Value Measurements and Disclosures:
| ● | Level 1 – Inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets. | |
| ● | Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. | |
| ● | Level 3 – Inputs to the valuation methodology are unobservable; that reflect management’s own assumptions about the assumptions market participants would make and significant to the fair value. |
We have not transferred any instruments between the three levels of the fair value hierarchy.
We measure cash, cash equivalents, marketable securities and our liability classified warrants at fair value on a recurring basis. The fair values of such assets were as follows for December 31, 2022 and 2021 (in thousands):
Schedule of Fair Value of Assets and Liabilities Valued on Recurring Basis
| Fair Value Measurements Using | ||||||||||||||||
| Balance at December 31, 2022 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| Assets: | ||||||||||||||||
| Money market fund (1) | $ | $ | $ | $ | ||||||||||||
| Marketable debt securities | ||||||||||||||||
| Marketable equity securities | ||||||||||||||||
| Liabilities: | ||||||||||||||||
| Warrants to purchase Cell Cure ordinary shares | ||||||||||||||||
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| Fair Value Measurements Using | ||||||||||||||||
| Balance at December 31, 2021 | Quoted Prices (Level 1) | Significant Other (Level 2) | Significant (Level 3) | |||||||||||||
| Assets: | ||||||||||||||||
| Money market fund (1) | $ | $ | $ | $ | ||||||||||||
| Marketable equity securities | ||||||||||||||||
| Liabilities: | ||||||||||||||||
| Warrants to purchase Cell Cure ordinary shares | ||||||||||||||||
| (1) |
In determining fair value of liability classified warrants, Lineage utilizes a Black-Scholes pricing model that maximizes the use of observable inputs and minimizes the use of unobservable inputs to the extent possible, and also considers counterparty credit risk in its assessment of fair value. The significant unobservable inputs used in the fair value measurement of the Company’s Level 3 Cell Cure warrant liabilities are volatility and share value. A significant increase or decrease in these Level 3 inputs could result in a significantly higher or lower fair value measurements.
The following table sets forth the establishment of the fair value of the Cell Cure warrants, as well as a summary of the changes in the fair value and other adjustments (in thousands):
Schedule of Changes in Fair Value
Cell Cure Warrants | ||||
| Balance as of December 31, 2021 | $ | |||
| Change in fair value and other adjustments | ( | ) | ||
| Balance as of December 31, 2022 | $ | |||
Lineage’s marketable equity securities includes the shares of stock of OncoCyte and HBL. Both securities have readily determinable fair values quoted on the NYSE American or TASE. These securities are measured at fair value and reported as current assets on the accompanying consolidated balance sheets based on the closing trading price of the security as of the date being presented.
The fair value of Lineage’s assets and liabilities, which qualify as financial instruments under FASB guidance regarding disclosures about fair value of financial instruments, approximate the carrying amounts presented in the accompanying consolidated balance sheets.
10. Related Party Transactions
In
connection with the putative shareholder class action lawsuits filed in February 2019 and October 2019 challenging the Asterias Merger
(see Note 14 (Commitments and Contingencies)), Lineage agreed to pay the expenses for the legal defense of Neal Bradsher, a member of
the Lineage board of directors, Broadwood Partners, L.P., a shareholder of Lineage, and Broadwood Capital, Inc., which serves as the
general partner of Broadwood Partners, L.P., all of which were named defendants in the lawsuits, prior to being dismissed. As of December
31, 2022, and 2021, Lineage had incurred a cumulative total of approximately $
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11. Shareholders’ Equity
Preferred Shares
Lineage
is authorized to issue preferred shares,
Common Shares
Lineage
is authorized to issue common shares,
At The Market Offering Program
In May 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 sell its common shares from time to time through an “at the market offering” program under the Sales Agreement.
In
March 2021, Lineage filed a prospectus supplement with the SEC in connection with the offer and sale of $
In
December 2021, Lineage filed a prospectus supplement with the SEC in connection with the offer and sale of up to $
As
of December 31, 2022, Lineage had sold common shares under the December 2021 Prospectus Supplement at a weighted average price
per share of $ for gross proceeds of $
The shares offered under the December 2021 Prospectus Supplement are registered pursuant to Lineage’s effective shelf registration statement on Form S-3 (File No. 333-237975), which was filed with the SEC on May 1, 2020 and declared effective on May 8, 2020, and Lineage’s effective shelf registration statement on Form S-3 (File No. 333-254167), which was filed with the SEC on March 5, 2021 and declared effective on March 19, 2021.
Lineage
agreed to pay Cantor Fitzgerald a commission of
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Warrants
Cell Cure Warrants – Liability Classified
In
July 2017, Cell Cure issued to HBL a warrant to purchase
A
warrant to purchase
ASC 815 requires freestanding financial instruments, such as warrants, with exercise prices denominated in currencies other than the functional currency of the issuer to be accounted for as liabilities at fair value, with all subsequent changes in fair value after the issuance date to be recorded as gains or losses in the consolidated statements of operations. Because the exercise price of the Cell Cure Warrants is U.S. dollar-denominated and settlement is not expected to occur in the next twelve months, Cell Cure classified the Cell Cure Warrants as a long-term liability in accordance with ASC 815.
The fair value of the Cell Cure Warrants at the time of issuance was determined by using the Black-Scholes option pricing model using the respective contractual term of the warrants. In applying this model, the fair value is determined by applying Level 3 inputs, as defined by ASC 820; these inputs are based on certain key assumptions including the fair value of the Cell Cure ordinary shares, adjusted for lack of marketability, as appropriate, and the expected stock price volatility over the term of the Cell Cure Warrants. The fair value of the Cell Cure ordinary shares is determined by Cell Cure’s Board of Directors, which may engage a valuation specialist to assist it in estimating the fair value, or may use recent transactions in Cell Cure shares, if any, as a reasonable approximation of fair value, or may apply other reasonable methods to determining the fair value, including a discount for lack of marketability. The Cell Cure Warrants are revalued each reporting period using the same methodology described above, with changes in fair value included as gains or losses in other income and expenses, net, in the consolidated statements of operations.
For
each of the years ended December 31, 2022 and 2021, Lineage recorded a noncash gain of $
Equity Incentive Plan Awards
In September 2021, our shareholders approved the Lineage Cell Therapeutics, Inc. 2021 Equity Incentive Plan (the “2021 Plan”), which became effective upon such approval. The 2021 Plan provides for the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, RSUs, and other stock awards. All of our employees (including those of our affiliates), non-employee directors and consultants are eligible to participate in the 2021 Plan.
Subject to adjustment for certain changes in our capitalization, the aggregate number of our common shares that may be issued under the 2021 Plan will not exceed the sum of (i) shares and (ii) the number of shares subject to awards granted under the Lineage Cell Therapeutics Inc. 2012 Equity Incentive Plan (the “2012 Plan”) that were outstanding when the 2021 Plan became effective and are not issued because such awards expire or otherwise terminate. As of December 31, 2022, there were shares available for grant under the 2021 Plan.
As a result of the approval of the 2021 Plan by our shareholders, no additional awards will be granted under the 2012 Plan or the Asterias 2013 Equity Incentive Award (the “Asterias Equity Plan”).
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Schedule of Share-based Compensation, Employee Stock Purchase Plan, Activity
| Number of Options Outstanding | Number of RSUs Outstanding | Weighted Average Exercise Price | ||||||||||
| December 31, 2021 | $ | |||||||||||
| Options granted | ||||||||||||
| Options expired/forfeited/cancelled | ( | ) | ||||||||||
| RSUs granted (1) | ||||||||||||
| RSUs forfeited | ( | ) | ||||||||||
| December 31, 2022 | $ | |||||||||||
| Options exercisable at December 31, 2022 | $ | |||||||||||
| (1) |
Schedule of Share-based Compensation, Employee Stock Purchase Plan, Activity
| Number of Options Outstanding | Number of RSUs Outstanding | Weighted Average Exercise Price | ||||||||||
| December 31, 2021 | $ | | ||||||||||
| RSUs vested | ( | ) | ||||||||||
| Options exercised | ( | ) | ||||||||||
| Options expired/forfeited/cancelled | ( | ) | ||||||||||
| December 31, 2022 | $ | |||||||||||
| Options exercisable at December 31, 2022 | $ | |||||||||||
Schedule of Share-based Compensation, Employee Stock Purchase Plan, Activity
Number of Options Outstanding | Weighted Average Exercise Price | |||||||
| December 31, 2021 | $ | | ||||||
| Options forfeited | ( | ) | ||||||
| December 31, 2022 | $ | |||||||
| Options exercisable at December 31, 2022 | $ | |||||||
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Stock-based compensation expense
Schedule of Weighted Average Assumptions to Calculate Fair Value of Stock Options
| Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Expected life (in years) | ||||||||
| Risk-free interest rates | % | % | ||||||
| Volatility | % | % | ||||||
| Dividend yield | % | % | ||||||
Schedule of Stock Based Compensation Expense
| Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Research and development | $ | $ | ||||||
| General and administrative | ||||||||
| Total stock-based compensation expense | $ | $ | ||||||
As of December 31, 2022, total unrecognized compensation costs related to unvested stock options and unvested RSUs under all equity plans (including the 2018 inducement option), were $ million, which is expected to be recognized as expense over a weighted average period of approximately years.
13. Income Taxes
For
the year ended December 31, 2022, Lineage recorded a withholding tax for the amount of $
The domestic and foreign breakout of loss before net income tax benefit was as follows:
Schedule of Income before Income Tax, Domestic and Foreign
| 2022 | 2021 | |||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Domestic | $ | ( | ) | $ | ( | ) | ||
| Foreign | ( | ) | ( | ) | ||||
| Loss before net income tax benefit | $ | ( | ) | $ | ( | ) | ||
Income taxes differed from the amounts computed by applying the indicated current U.S. federal income tax rate to pretax losses from operations as a result of the following:
Schedule of Income Tax Rate Reconciliation
| 2022 | 2021 | |||||||
| Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Computed tax benefit at federal statutory rate | % | % | ||||||
| Research and development and other credits | % | % | ||||||
| Withholding tax | ( | )% | % | |||||
| Permanent differences | ( | )% | ( | )% | ||||
| Change in valuation allowance | ( | )% | ( | )% | ||||
| State tax benefit | % | % | ||||||
| GILTI inclusion | ( | )% | ( | )% | ||||
| Foreign rate differential and other | % | ( | )% | |||||
| Income tax benefit | ( | )% | % | |||||
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The primary components of the deferred tax assets and liabilities at December 31, 2022 and 2021 were as follows (in thousands):
Schedule of Components of Deferred Tax Assets and Liabilities
| Deferred tax assets/(liabilities): | 2022 | 2021 | ||||||
| December 31, | ||||||||
| Deferred tax assets/(liabilities): | 2022 | 2021 | ||||||
| Net operating loss carryforwards | $ | $ | ||||||
| Research and development and other credits | ||||||||
| Patents and licenses | ||||||||
| Stock options | ||||||||
| Operating lease liability | ||||||||
| Capitalized research expense | ||||||||
| Other | ||||||||
| Total deferred tax assets | ||||||||
| Valuation allowance | ( | ) | ( | ) | ||||
| Deferred assets, net of valuation allowance | ||||||||
| Operating lease ROU assets | ( | ) | ( | ) | ||||
| Intangibles | ( | ) | ( | ) | ||||
| Equity method investments and marketable securities at fair value | ( | ) | ( | ) | ||||
| Total deferred tax liabilities | ( | ) | ( | ) | ||||
| Net deferred tax liabilities | $ | ( | ) | $ | ( | ) | ||
Under ASC 740, a valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. Lineage established a full valuation allowance as of December 31, 2018 due to the uncertainty of realizing future tax benefits from its net operating loss carryforwards and other deferred tax assets, including foreign net operating losses generated by its subsidiaries.
As
of December 31, 2022, Lineage has gross net operating loss carryforwards, of approximately $
As
of December 31, 2022, Lineage has net operating losses of $
As
of December 31, 2022, Lineage has research tax credit carryforwards for federal and state tax purposes of $
On
December 17, 2021, Lineage and its subsidiary, Cell Cure, entered into a Collaboration and License Agreement with Roche, wherein Lineage
granted to Roche exclusive worldwide rights to develop and commercialize RPE cell therapies. Under the agreement Roche paid Lineage a
$
For the tax years beginning on or after January 1, 2022, the Tax Cuts and Jobs Act of 2017 (“TCJA”) eliminates the option to currently deduct research and development expenses and requires taxpayers to capitalize and amortize them over five years for research activities performed in the United States and 15 years for research activities performed outside the United States pursuant to IRC Section 174. Although Congress is considering legislation that would repeal or defer this capitalization and amortization requirement, it is not certain that this provision will be repealed or otherwise modified. If the requirement is not repealed or replaced, it will decrease our tax deduction for research and development expense in future years.
During
December 2021, in an intercompany transaction, Lineage acquired the economic rights to Cell Cure’s interest in certain intellectual
property. This transaction generated a gain to Cell Cure of $
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The
2017 Tax Act subjects a U.S. stockholder to GILTI earned by certain foreign subsidiaries. In general, GILTI is the excess of a U.S. stockholder’s
total net foreign income over a deemed return on tangible assets. The provision further allows a deduction of 50% of GILTI, however this
deduction is limited to the company’s pre-GILTI U.S. income. For the years ended December 31, 2022 and 2021, Lineage’s combined
foreign entities generated a profit arising from intercompany transactions. As a result, there was an inclusion of $
Other Income Tax Matters
Internal Revenue Code Section 382 places a limitation (“Section 382 Limitation”) on the amount of taxable income that can be offset by NOL carryforwards after a change in control (generally greater than 50% change in ownership within a three-year period) of a loss corporation. California has similar rules. Generally, after a change in control, a loss corporation cannot deduct NOL carryforwards in excess of the Section 382 Limitation. Due to these “change in ownership” provisions, utilization of the NOL and tax credit carryforwards may be subject to an annual limitation regarding their utilization against taxable income in future periods.
Lineage files a U.S. federal income tax return as well as a California combined and foreign income tax returns. In general, Lineage is no longer subject to tax examination by major taxing authorities for years before 2018. Although the statute is closed for purposes of assessing additional income and tax in these years, the taxing authorities may still make adjustments to the NOL and credit carryforwards used in open years. Therefore, the statute should be considered open as it relates to the NOL and credit carryforwards used in open years.
Lineage may be subject to potential examination by U.S. federal, U.S. states or foreign jurisdiction authorities in the areas of income taxes. These potential examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions and compliance with U.S. federal, U.S. state and foreign tax laws. Based on Lineage’s assessment, no liabilities for uncertain tax positions should be recorded as of December 31, 2022 and 2021. Lineage’s management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.
Lineage’s practice is to recognize interest and penalties related to income tax matters in tax expense. As of December 31, 2022 and 2021, Lineage has no accrued interest and penalties.
14. Commitments and Contingencies
Real Property Leases
Carlsbad Lease
In
May 2019, Lineage entered into a lease for approximately
In addition to base rent, Lineage pays a pro-rata portion of increases in certain expenses, including real property taxes, utilities (to the extent not separately metered to the leased space) and the landlord’s operating expenses, over the amounts of those expenses incurred by the landlord. These pro-rata charges are expensed as incurred and excluded from the calculation of the ROU assets and lease liabilities.
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Carlsbad Sublease
In
September 2022, Lineage, as sublessee, entered into a sublease for approximately
Alameda Leases and Alameda Sublease
In
December 2015, Lineage entered into leases of office and laboratory space located in
Cell Cure Leases
Cell
Cure leases
In
January 2018, Cell Cure entered into a lease for an additional
In
November 2021, Cell Cure entered into a lease for an additional
In
August 2022, Cell Cure entered into a new lease for
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Supplemental Information – Leases
Supplemental cash flow information related to leases is as follows (in thousands):
Schedule of Supplemental Cash Flow Information Related to Leases
| 2022 | 2021 | |||||||
Twelve Months Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows from operating leases | $ | $ | ||||||
| Operating cash flows from financing leases | ||||||||
| Financing cash flows from financing leases | ||||||||
| Right-of-use assets obtained in exchange for lease obligations: | ||||||||
| Operating leases | ||||||||
| Financing leases | ||||||||
Supplemental balance sheet information related to leases was as follows (in thousands, except lease term and discount rate):
Schedule of Supplemental Balance Sheet Information Related to Leases
December 31, 2022 | December 31, 2021 | |||||||
| Operating leases | ||||||||
| Right-of-use assets, net | $ | $ | ||||||
| Right-of-use lease liabilities, current | $ | $ | ||||||
| Right-of-use lease liabilities, noncurrent | ||||||||
| Total operating lease liabilities | $ | $ | ||||||
| Financing leases | ||||||||
| Right-of-use assets, net | $ | $ | ||||||
| Lease liabilities, current | $ | $ | ||||||
| Lease liabilities, noncurrent | ||||||||
| Total lease liabilities | $ | $ | ||||||
| Other current liabilities | ||||||||
| Long-term liabilities | ||||||||
| Total finance lease liabilities | $ | $ | ||||||
| Weighted average remaining lease term | ||||||||
| Operating leases | ||||||||
| Finance leases | ||||||||
| Weighted average discount rate | ||||||||
| Operating leases | % | % | ||||||
| Finance leases | % | % | ||||||
Future minimum lease commitments are as follows as of December 31, 2022 (in thousands):
Schedule of Future Minimum Lease Commitments
| Operating Leases | Finance Leases | |||||||
| Year Ending December 31, | ||||||||
| 2023 | $ | $ | ||||||
| 2024 | ||||||||
| 2025 | ||||||||
| 2026 | ||||||||
| 2027 | ||||||||
| Total lease payments | ||||||||
| Less imputed interest | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
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Collaborations
Roche Agreement
In December 2021, Lineage entered into the Roche Agreement, wherein Lineage granted to Roche exclusive worldwide rights to develop and commercialize RPE cell therapies, including Lineage’s proprietary cell therapy known as OpRegen, for the treatment of ocular disorders, including GA secondary to AMD.
Under
the terms of the Roche Agreement, Roche paid Lineage a $
Unless earlier terminated by either party, the Roche Agreement will expire on a product-by-product and country-by-country basis upon the expiration of all of Roche’s payment obligations under the agreement. Roche may terminate the agreement in its entirety, or on a product-by-product or country-by-country basis, at any time with advance written notice. Either party may terminate the agreement in its entirety with written notice for the other party’s material breach if such party fails to cure the breach or upon certain insolvency events involving the other party.
In
January 2022, Lineage received the $
ITI Collaboration Agreement
Under
Lineage’s collaborative agreement with Immunomic Therapeutics, Inc., Lineage agreed to perform up to approximately $
Agreements with Hadasit and IIA
The OpRegen program was supported in part with licenses to technology obtained from Hadasit, the technology transfer company of Hadassah Medical Center, and through a series of research grants from the IIA, an independent agency created to address the needs of global innovation ecosystems. A subset of the intellectual property underlying OpRegen was originally generated at Hadassah Medical Center and licensed to Cell Cure for further development.
Under
the Encouragement of Research, Development and Technological Innovation in the Industry Law 5744, and the regulations, guidelines, rules,
procedures and benefit tracks thereunder, annual research and development programs that meet specified criteria and were approved by
a committee of the IIA were eligible for grants. The grants awarded were typically up to
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The
terms of the grants under the Innovation Law generally require that the products developed as part of the programs under which the grants
were given be manufactured in Israel. The know-how developed thereunder may not be transferred outside of Israel unless prior written
approval is received from the IIA. Transfer of IIA-funded know-how outside of Israel is subject to approval and payment of a redemption
fee to the IIA calculated according to formulas provided under the Innovation Law. In November 2021, the IIA research committee approved
an application made by Cell Cure with respect to the grant of an exclusive license and transfer of the technological know-how for OpRegen
to Roche. Under the provisions for the redemption fee, Lineage is obligated to pay the IIA approximately
Pursuant
to the Second Amended and Restated License Agreement, dated June 15, 2017, between Cell Cure and Hadasit, and a certain letter agreement
entered into on December 17, 2021, Hadasit was entitled to, and was paid, a sublicensing fee of
Second Amendment to Clinical Trial and Option Agreement and License Agreement with Cancer Research UK
In May 2020, Lineage and Asterias entered into a Second Amendment to Clinical Trial and Option Agreement (the “CTOA Amendment”) with CRUK and CRT, which amends the Clinical Trial and Option Agreement entered into between Asterias, CRUK and CRT dated September 8, 2014, as amended September 8, 2014. Pursuant to the CTOA Amendment, Lineage assumed all obligations of Asterias and exercised early its option to acquire data generated in the Phase 1 clinical trial of VAC2 in non-small cell lung cancer being conducted by CRUK.
Lineage
and CRT effectuated the option by simultaneously entering into a license agreement (the “CRT License Agreement”) pursuant
to which Lineage agreed to pay the previously agreed signature fee of £
Either party may terminate the CRT License Agreement for the uncured material breach of the other party. CRT may terminate the CRT License Agreement in the case of Lineage’s insolvency or if Lineage ceases all development and commercialization of all products under the CRT License Agreement.
Other Contingent Obligations
Other than disclosed above, we have obligations under various license agreements and grants received from government entities to make future payments to third parties, which become due and payable on the achievement of certain development, regulatory and commercial milestones or on the sublicense of our rights to another party. These commitments include sublicense fees, milestone payments, redemption fees and royalties. Sublicense fees are payable to licensors or government entities when we sublicense underlying intellectual property to third parties; the fees are based on a percentage of the license fees we receive from sublicensees. Milestone payments are due to licensors or government entities upon the future achievement of certain development and regulatory milestones. Redemption fees due to the IIA under the Innovation Law are due upon receipt of any milestone and royalties received under the Roche Agreement. Royalties are payable to licensors or government entities based on a percentage of net sales of licensed products. As of December 31, 2022, we have not included these commitments on our consolidated balance sheet because the achievement and timing of these events are not fixed and determinable.
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Litigation – General
From time to time, we are subject to legal proceedings and claims in the ordinary course of business. While management presently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not materially harm our financial position, cash flows, or overall trends in results of operations, legal proceedings are subject to inherent uncertainties, and unfavorable rulings or outcomes could occur that have individually or in aggregate, a material adverse effect on our business, financial condition or operating results. We are not currently subject to any pending material litigation, other than ordinary routine litigation incidental to our business, as described above.
Asterias Merger
In November 2018, Lineage, Asterias Biotherapeutics, Inc. (“Asterias”), and Patrick Merger Sub, Inc., a wholly owned subsidiary of Lineage, entered into an Agreement and Plan of Merger pursuant to which Lineage agreed to acquire all of the outstanding common stock of Asterias in a stock-for-stock transaction (the “Asterias Merger”). The Asterias Merger closed in March 2019.
In October 2019, a putative class action lawsuit was filed challenging the Asterias Merger. The lawsuit (captioned Ross v. Lineage Cell Therapeutics, Inc., et al., C.A. No. 2019-0822) was filed in Delaware Chancery Court and named, among other defendants, Lineage, Michael H. Mulroy, Alfred D. Kingsley, Richard T. LeBuhn and Aditya Mohanty. Messrs. Mulroy and Kingsley are members of the Lineage board of directors and were former members of the Asterias board of directors. Messrs. LeBuhn and Mohanty were also former members of the Asterias board of directors, and Mr. Mohanty was a former member of the Lineage board of directors and a former chief executive officer of Lineage. The lawsuit was brought by a purported stockholder of Asterias, on behalf of a putative class of Asterias stockholders, and asserts breach of fiduciary duty and aiding and abetting claims under Delaware law.
In April 2022, the parties reached an agreement in principle to settle the lawsuit and, in October 2022, the plaintiff, on behalf of himself and all others similarly situated, Lineage and Messrs. Mulroy, Kingsley, LeBuhn and Mohanty entered into a Stipulation and Agreement of Compromise and Settlement (the “Settlement Agreement”). The effectiveness of the Settlement Agreement was subject to court approval, which, as discussed in Note 19 (Subsequent Events), was obtained in February 2023.
In accordance with ASC 450, Contingencies, Lineage has recorded an accrual for a liability associated with the proposed settlement, acknowledging that a liability is probable, and the amount of the loss is estimable.
See Note 19 (Subsequent Events) for an update on Asterias Merger Litigation.
Employment Contracts
Lineage has entered into employment agreements with certain executive officers. Under the provisions of the agreements, Lineage may be required to incur severance obligations for matters relating to changes in control, as defined in the agreements, and involuntary terminations.
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Indemnification
In the normal course of business, Lineage may agree to indemnify and reimburse other parties, typically Lineage’s clinical research organizations, investigators, clinical sites, and suppliers, for losses and expenses suffered or incurred by the indemnified parties arising from claims of third parties in connection with the use or testing of Lineage’s products and services. Indemnification could also cover third party infringement claims with respect to patent rights, copyrights, or other intellectual property pertaining to Lineage products and services. The term of these indemnification agreements generally continue in effect after the termination or expiration of the particular research, development, services, or license agreement to which they relate. The potential future payments Lineage could be required to make under these indemnification agreements will generally not be subject to any specified maximum amount. Generally, Lineage has not been subject to any material claims or demands for indemnification. Lineage maintains liability insurance policies that limit its financial exposure under the indemnification agreements. Accordingly, Lineage has not recorded any liabilities for these agreements as of December 31, 2022 or December 31, 2021.
Royalty Obligations and License Fees
We have licensing agreements with research institutions, universities and other parties providing us with certain rights to use intellectual property in conducting research and development activities in exchange for the payment of royalties on future product sales, if any. In addition, in order to maintain these licenses and other rights, we must comply with various conditions including the payment of patent related costs and annual minimum maintenance fees.
As part of the Asterias Merger, Lineage acquired certain royalty revenues for cash flows generated under certain patent families that Asterias acquired from Geron Corporation. Lineage continues to make royalty payments to Geron from royalties generated from these patents.
15. Employee Benefit Plan
We
have a defined contribution 401(k) plan for all employees. Under the terms of the plan, employees may make voluntary contributions as
a percentage or defined amount of compensation. We provide a safe harbor contribution of up to
16. Segment Information
Lineage’s
executive management team, as a group, represents the entity’s chief operating decision makers. Lineage’s executive management
team views Lineage’s operations as
17. Enterprise-Wide Disclosures
Geographic Area Information
The following table presents consolidated revenues, including license fees, royalties, grant income, and other revenues, disaggregated by geography, based on the billing addresses of customers, or in the case of grant revenues based on where the governmental entities that fund the grant are located (in thousands).
Schedule of Geographic Area Information
| Geographic Area | 2022 | 2021 | ||||||
| Year Ended December 31, | ||||||||
| Geographic Area | 2022 | 2021 | ||||||
| United States | $ | $ | ||||||
| Foreign (1) | ||||||||
| Total revenues | $ | $ | ||||||
| (1) |
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The composition of Lineage’s long-lived assets, consisting of plant and equipment, net, between those in the United States and in foreign countries, as of December 31, 2022 and 2021, is set forth below (in thousands):
| 2022 | 2021 | |||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Domestic | $ | $ | ||||||
| Foreign (1) | ||||||||
| Total | $ | $ | ||||||
| (1) |
Major Sources of Revenues
The following table presents Lineage’s consolidated revenues disaggregated by source (in thousands).
Schedule of Revenues Disaggregated by Source
| 2022 | 2021 | |||||||
| Year Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| REVENUES: | ||||||||
| Collaboration revenues | $ | $ | ||||||
| Royalties | ||||||||
| Grant revenues | ||||||||
| Total revenues | $ | $ | ||||||
The following table shows Lineage’s major sources of revenues, as a percentage of total revenues, that were recognized during the years ended December 31, 2022 and 2021:
Schedule of Sources of Revenues
| Sources of Revenues | 2022 | 2021 | ||||||
| Year Ended December 31, | ||||||||
| Sources of Revenues | 2022 | 2021 | ||||||
| Collaboration revenues | % | % | ||||||
| Royalties | % | % | ||||||
| Grant revenues | % | |||||||
18. Selected Quarterly Financial Information (UNAUDITED, in thousands, except per share data)
Lineage has derived this data from the unaudited consolidated interim financial statements that, in Lineage’ s opinion, have been prepared on substantially the same basis as the audited consolidated financial statements contained herein and include all normal recurring adjustments necessary for a fair presentation of the financial information for the periods presented. These unaudited consolidated quarterly results should be read in conjunction with the consolidated financial statements and notes thereto included herein. The consolidated operating results in any quarter are not necessarily indicative of the consolidated results that may be expected for any future period.
Schedule of Selected Quarterly Financial Information
| Year Ended December 31, 2022 | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||
| Revenues, net | $ | $ | $ | $ | ||||||||||||
| Operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to Lineage | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Basic net income (loss) per share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Year Ended December 31, 2021 | ||||||||||||||||
| Revenues, net | $ | $ | $ | $ | ||||||||||||
| Operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss) attributable to Lineage | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Basic net income (loss) per share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Quarterly and year-to-date computations of net income (loss) per share amounts are calculated using the respective period weighted average shares outstanding. Therefore, the sum of the per share amounts for the quarters may not agree with the per share amounts for the year.
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19. Subsequent Events
Asterias Merger Litigation Settlement
In
February 2023, the court approved the Settlement Agreement. Pursuant to the terms of the Settlement Agreement, Lineage and certain insurers
of the defendants paid $
Lineage and all defendants have denied, and continue to deny, the claims alleged in the lawsuit and the settlement does not reflect or constitute any admission, concession, presumption, proof, evidence or finding of any liability, fault, wrongdoing or injury or damages, or of any wrongful conduct, acts or omissions on the part any defendant.
Premvia Litigation Settlement
In
July 2019, the Company, along with other named defendants, was sued in the Superior Court of the State of California in a matter captioned
Gonzalez v. Aronowitz, M.D., et al. The plaintiff asserted medical negligence and product liability causes of action relating
to the use in a clinical trial of a product candidate Premvia, that the Company is no longer developing and has no plans to pursue,
and that is not related to the cell therapy candidates the Company currently is developing. In February 2023, the Company and the other
defendants each entered into settlement agreements with the plaintiff pursuant to which the defendants without admitting any liability,
which the defendants expressly denied, each agreed to pay specified amounts to the plaintiff in exchange for a full settlement and release
and discharge of claims. The Company’s insurance covered the full amount paid by the Company excluding the $
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| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
Not applicable.
| ITEM 9A. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
It is management’s responsibility to establish and maintain adequate internal control over all financial reporting pursuant to Rule 13a-15 under the Exchange Act. Our management, including our principal executive officer and our principal financial officer, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2022. Following this review and evaluation, management collectively determined that our disclosure controls and procedures were effective as of December 31, 2022 to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act: (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms; and (ii) is accumulated and communicated to management, including principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the fourth quarter of 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), is a process designed by, or under the supervision of, our principal executive officer, and our principal financial officer, and effected by our Board of Directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
| ● | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; | |
| ● | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and | |
| ● | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. The scope of management’s assessment of the effectiveness of internal control over financial reporting includes our consolidated subsidiaries.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2022, based on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of that date, our internal control over financial reporting was effective.
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| ITEM 9B. | OTHER INFORMATION |
None
| ITEM 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections |
Not applicable
PART III
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE |
The information required by this Item will be included in our definitive proxy statement to be filed with the SEC within 120 days after the December 31, 2022, in connection with the solicitation of proxies for our 2023 annual meeting of shareholders (the “2023 Proxy Statement”), and is incorporated herein by reference.
We have a written Code of Ethics that applies to our principal executive officer, our principal financial officer and accounting officer, our other executive officers, and our directors. The purpose of the Code of Ethics is to promote (i) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; (ii) full, fair, accurate, timely, and understandable disclosure in reports and documents that we file with or submit to the Securities and Exchange Commission and in our other public communications; (iii) compliance with applicable governmental rules and regulations; (iv) prompt internal reporting of violations of the Code of Ethics to an appropriate person or persons identified in the Code; and (v) accountability for adherence to the Code. A copy of our Code of Ethics has been posted on our internet website and can be found at www.lineagecell.com. If we amend or waive a provision of our Code of Ethics that applies to our chief executive officer or chief financial officer, we will post the amended Code of Ethics or information about the waiver on our internet website.
| ITEM 11. | EXECUTIVE COMPENSATION |
The information required by this Item will be included in the 2023 Proxy Statement and is incorporated herein by reference.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED STOCKHOLDER MATTERS |
The information required by this Item will be included in the 2023 Proxy Statement and is incorporated herein by reference.
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by this Item will be included in the 2023 Proxy Statement and is incorporated herein by reference.
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by this Item will be included in the 2023 Proxy Statement and is incorporated herein by reference.
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PART IV
| ITEM 15. | EXHIBITS AND, FINANCIAL STATEMENT SCHEDULES |
(a)(1) Financial Statements.
The following financial statements of Lineage are filed in this report:
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and accompanying notes included in this report.
(a)(3) Exhibits.
Exhibits not filed or furnished herewith are incorporated by reference to exhibits previously filed with the SEC, as reflected in the table below. We will furnish a copy of any exhibit to stockholders, without charge upon written request to Lineage Cell Therapeutics, Inc., 2173 Salk Avenue, Suite 200 Carlsbad, CA 92008, or by calling (442) 287-8990.
| Incorporation by Reference | ||||||||||
| Exhibit Number |
Description | Exhibit Number |
Filing | Filing Date | File No. | |||||
| PLANS OF ACQUISITION | ||||||||||
| 2.01^ | Agreement and Plan of Merger dated November 7, 2018, among Registrant, Patrick Merger Sub, Inc. and Asterias Biotherapeutics, Inc. (“Asterias”) | 2.1 | 8-K | November 8, 2018 | 001-12830 | |||||
| ARTICLES OF INCORPORATION AND BYLAWS | ||||||||||
| 3.01 | Restated Articles of Incorporation, as amended | 3.1 | 10-Q | May 10, 2018 | 001-12830 | |||||
| 3.02 | Certificate of Ownership | 3.1 | 8-K | August 12, 2019 | 001-12830 | |||||
| 3.03 | Amended and Restated Bylaws | 3.2 | 8-K | August 12, 2019 | 001-12830 | |||||
| INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS | ||||||||||
| 4.01 | Specimen of Common Share Certificate | S-1 | December 18, 1991 | 033-44549 | ||||||
| 4.02 | Description of Capital Stock of the Registrant | 4.2 | 10-K | March 11, 2021 | 001-12830 | |||||
| MANAGEMENT CONTRACTS AND COMPENSATORY PLANS | ||||||||||
| 10.01+ | Form of Indemnification Agreement entered into between the Registrant and its Directors and Officers | 10.1 | 10-Q | August 11, 2022 | 001-12830 | |||||
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^ The schedules and exhibits to the merger agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished to the Securities and Exchange Commission upon request.
* Filed herewith.
# Furnished herewith.
+ Indicates management contract or compensatory plan or arrangement.
† Portions of this exhibit have been omitted pursuant to a request for confidential treatment.
†† Certain information in this exhibit has been omitted pursuant to Item 601 of Regulation S-K.
| ITEM 16. | FORM 10-K SUMMARY |
None
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
| Date: March 9, 2023 | LINEAGE CELL THERAPEUTICS, INC. | |
| By: | /s/ Brian M. Culley | |
| Brian M. Culley | ||
| Chief Executive Officer | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Brian M. Culley | Chief Executive Officer and Director | March 9, 2023 | ||
| BRIAN M. CULLEY | (Principal Executive Officer) | |||
| /s/ Jill Ann Howe | Chief Financial Officer | March 9, 2023 | ||
| JILL ANN HOWE | (Principal Financial and Accounting Officer) | |||
| /s/ Deborah Andrews | Director | March 9, 2023 | ||
| DEBORAH ANDREWS | ||||
| /s/ Dipti Amin | Director | March 9, 2023 | ||
| DIPTI AMIN | ||||
| /s/ Don M. Bailey | Director | March 9, 2023 | ||
| DON M. BAILEY | ||||
| /s/ Neal C. Bradsher | Director | March 9, 2023 | ||
| NEAL C. BRADSHER | ||||
| /s/ Alfred D. Kingsley | Director | March 9, 2023 | ||
| ALFRED D. KINGSLEY | ||||
| /s/ Anula Jayasuriya | Director | March 9, 2023 | ||
| ANULA JAYASURIYA | ||||
| /s/ Michael H. Mulroy | Director | March 9, 2023 | ||
| MICHAEL H. MULROY | ||||
| /s/ Angus C. Russell | Director | March 9, 2023 | ||
| ANGUS C. RUSSELL |
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Exhibit 10.07
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (this “Agreement”) is made as of October 28, 2022, by and between Lineage Cell Therapeutics, Inc., a California corporation (together with any successor in interest thereto that has assumed its rights and obligations hereunder, whether by operation of law or otherwise, “Company”), and Jill Ann Howe (“Executive”).
NOW, THEREFORE, in consideration of the terms and conditions hereinafter set forth, the parties hereto agree as follows:
1. Engagement; Position and Duties.
(a) Position and Duties. Company agrees to continue to employ Executive in the position of Chief Financial Officer of Company, and Executive agrees to perform the duties as outlined on Exhibit A and as the Chief Executive Officer (“CEO”) or the Board of Directors of Company (the “Board of Directors”) may from time to time direct or require. Executive shall report to the CEO. Executive shall devote Executive’s best efforts, skills and abilities, on a full-time basis, exclusively to Company’s business. Executive covenants and agrees to faithfully adhere to and fulfill such policies as are established from time to time by the Board of Directors or Company (collectively, the “Policies”).
(b) No Conflicting Obligations. Executive represents and warrants to Company that Executive has never been under any, and is currently under no obligations or commitments, whether contractual or otherwise, that are inconsistent with Executive’s obligations under this Agreement or that would prohibit Executive, contractually or otherwise, from performing Executive’s duties under this Agreement and/or the Policies.
(c) No Unauthorized Use of Third Party Intellectual Property. Executive represents and warrants to Company that Executive has not used or disclosed, and will not use or disclose, in connection with Executive’s employment by Company, any patents, trade secrets, confidential information, or other proprietary information or intellectual property as to which any other person has any right, title or interest, except to the extent that Company holds a valid license or other written permission for such use from the owner(s) thereof. Executive represents and warrants to Company that Executive has returned all property and confidential information belonging to any prior employer to such prior employer.
(d) Start Date. Executive shall commence employment with Company on November 14, 2022, or such other date as mutually agreed upon by Executive and Company (the date on which Executive actually commences employment with Company, the “Start Date”).
2. Compensation
(a) Salary. During the term of this Agreement, Company shall pay to Executive an annual salary (“Salary”) of $415,000. Executive’s Salary shall be paid in equal semi-monthly installments, consistent with Company’s regular salary payment practices. Executive’s Salary may be increased from time-to-time by the Board of Directors or the Compensation Committee of the Board of Directors (the “Compensation Committee”), in their sole and absolute discretion, without affecting this Agreement.
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(b) Sign-on Bonus. Company shall pay Executive a one-time sign-on bonus of $50,000 (minus applicable taxes, deductions and withholdings), payable in 5 installments consistent with Company’s payroll procedures, commencing on the date of the first regular payroll following the Start Date, provided that Executive remains employed as of such installment date.
(c) Bonus. Executive may be eligible for an annual bonus targeted at 40% of Executive’s Salary (at the rate in effect on the date any such annual bonus is established), as may be approved by the Board of Directors or the Compensation Committee, in their discretion, based on Executive’s achievement of predetermined Company and/or individual objectives set by the Board of Directors or the Compensation Committee, from time to time. Executive also agrees that neither the Board of Directors nor Company is obligated to adopt any bonus plan, to maintain in effect any bonus plan that may now be in effect or that may be adopted during the term of Executive’s employment, or to pay Executive a bonus unless a bonus is earned under the terms and conditions of any bonus plan adopted by Company. Executive’s annual bonus target percentage may be increased from time-to-time by the Board of Directors or the Compensation Committee, in their sole and absolute discretion, without affecting this Agreement. The annual bonus for 2022 will be pro-rated by multiplying (i) the amount of the bonus earned by Executive for 2022, if any, by (ii) a fraction, the numerator of which is the number of days between the Start Date and December 31, 2022, and the denominator of which is 365.
(d) Expense Reimbursements. Company shall reimburse Executive for reasonable travel and other business expenses (but not expenses of commuting to Executive’s primary workplace) incurred by Executive in the performance of Executive’s duties under this Agreement, subject to, and in accordance with, the Policies and Company procedures in effect from time to time, and provided that Executive submits supporting vouchers.
(e) Benefit Plans. Executive may be eligible (to the extent Executive qualifies) to participate in certain retirement, pension, life, health, accident and disability insurance, equity incentive plan or other similar employee benefit plans (collectively, “Benefit Plans”), which may be adopted by Company from time to time for its executive officers or other employees, in each case, subject to the terms thereof, including any eligibility requirements thereof. Company has the right, at any time and without any amendment of this Agreement, and without prior notice to or consent from Executive, to adopt, amend, change, or terminate any and all Benefit Plans that may now be in effect or that may be adopted in the future, in each case without any further obligation (financial or otherwise) to Executive; provided that any such amendment, change or termination effected without the consent of Executive does not apply to Executive in a manner that is different than it applies to other Company executives or employees of a comparable executive level, except for amendments, changes or terminations required by applicable federal, state or local law or regulation, or implemented in response to any change of federal, state or local law or regulation. Any benefits to which Executive may be entitled under any Benefit Plan shall be governed by the terms and conditions of the applicable Benefit Plan, and any related plan documents, as in effect from time to time. If Executive receives any grant of stock options or stock or stock related equity awards (“Awards”) under any stock option plan, stock purchase plan, or other equity incentive plan of Company (an “Equity Plan”), the terms and conditions of the Award, and Executive’s rights with respect to the Award, shall be governed by (i) the terms of the Equity Plan, as the same may be amended from time to time, and (ii) the terms and conditions of any stock option agreement, stock purchase agreement, or other agreement that Executive may sign or be required to sign with respect to any Award (an “Award Agreement”); provided that in the event of any conflict between the Equity Plan or Award Agreement and Section 5(a)(iii)(E) hereof with respect to acceleration of the vesting of any Awards in connection with a Change in Control, the provisions of Section 5(a)(iii)(E) hereof shall control.
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(f) Vacation. Executive shall be entitled to 20 paid time off (“PTO”) days per calendar year (capped at 30 days such that no further PTO accruals shall apply unless and until the PTO balance is less than 30 days) without reduction in compensation. Executive’s PTO shall be taken at such time as is consistent with Company needs and the Policies. All PTO days shall accrue annually on a semi-monthly pay period basis based upon days of service. The Policies governing the disposition of unused PTO days remaining at the end of the calendar year shall govern whether unused vacation days will be paid, lost, or carried over into subsequent calendar years.
(g) Stock Option Grant. Executive shall be granted a stock option to purchase up to 1,000,000 shares of Company common stock (the “Option”). The Option: (1) will have an exercise price equal to the closing price of Company common stock on the grant date, (2) will vest as to ¼ of the shares subject to the Option on the first anniversary of the Start Date and the remainder of the shares will vest in a series of 36 successive substantially equal monthly installments thereafter, and (3) will be subject to the terms set forth in Company’s equity incentive plan pursuant to which the Option grant is made and to the terms of the stock option agreement Executive will be required to sign with respect to the Option.
(h) Withholdings. All compensation payable by Company to Executive, including amounts payable under Section 5, if any, and under any other compensatory arrangement, is subject to applicable taxes, deductions and withholdings.
3. Competitive Activities. During Executive’s employment, and for 24 months thereafter, Executive shall not, for Executive or any third party, directly or indirectly employ, solicit for employment or recommend for employment any person employed by Company. During Executive’s employment, Executive shall not, directly or indirectly as an employee, contractor, officer, director, member, partner, agent, or equity owner, engage in any activity or business that competes or could reasonably be expected to compete with the business of Company. Executive acknowledges that there is a substantial likelihood that the activities described in this Section 3 would (a) involve the unauthorized use or disclosure of Company’s confidential information and that use or disclosure would be extremely difficult to detect, and (b) result in substantial competitive harm to the business of Company. Executive has accepted the limitations of this Section 3 as a reasonably practicable and unrestrictive means of preventing such use or disclosure of Company confidential information and preventing such competitive harm.
4. Inventions/Intellectual Property/Confidential Information. Executive acknowledges the execution and delivery to Company of an Employee Confidential Information and Inventions Assignment Agreement (the “Confidentiality and IP Agreement”), attached hereto as Exhibit B.
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5. Termination of Employment. Executive understands and agrees that Executive’s employment has no specific term. This Agreement, and the employment relationship, are “at will” and may be terminated by Executive or by Company with or without cause at any time by notice given orally or in writing. Except as otherwise agreed in writing signed on behalf of Company with the express authorization of the Board of Directors or the Compensation Committee or as otherwise provided in this Agreement, upon termination of Executive’s employment, Company shall have no further obligation to Executive, by way of compensation or otherwise and Executive shall be deemed to have then resigned from all positions and roles (including from the board of directors or similar governing body) with Company and any of its subsidiaries or affiliates.
(a) Payments Due Upon Termination of Employment. Upon termination of Executive’s employment with Company at any time and for any reason, in the event of the termination of Executive’s employment by Company for Cause, or termination of Executive’s employment as a result of death, Disability (as defined below), or resignation, Executive will be entitled to receive only the benefits set forth below, and Executive will not be entitled to any other compensation, award, or damages with respect to Executive’s employment or termination of employment.
| (i) | Termination for Cause, Death, Disability, or Resignation without Good Reason. In the event of the termination of Executive’s employment by Company for Cause or as a result of the death or Disability of Executive or if Executive resigns without Good Reason, Executive will be entitled to receive payment for (a) all accrued but unpaid Salary actually earned prior to or as of the date of termination of Executive’s employment, and (b) all accrued and unused PTO actually earned prior to or as of the date of termination of Executive’s employment. Executive will not be entitled to any severance benefits or additional vesting of any stock options or other equity or cash awards. The payments under this Section 5(a)(i) are collectively referred to as the “Accrued Benefits” and shall be paid to Executive not later than when required by applicable law. | |
| (ii) | Termination Without Cause, or Resignation for Good Reason. In the event of termination of Executive’s employment by Company without Cause or if Executive resigns for Good Reason, Executive will be entitled to receive: (A) the Accrued Benefits; (B) an aggregate amount equal to 9 months’ Salary (at the rate in effect on the date of termination); (C) payment of a prorated (based on the number of days Executive was employed by Company in the calendar year of termination) target bonus for the year in which Executive’s employment was so terminated; and (D) payment by Company each month, for a period starting on the date of termination and ending on 9 months following the date of termination, of 100% of the premium of any health insurance benefits Executive was receiving at the time of termination of Executive’s employment under a Company employee health insurance plan subject to COBRA, provided that Executive timely elects to have such COBRA coverage. The amounts set forth in clauses (B) and (C) of this Section 5(a)(ii) shall be paid in installments consistent with the payment of Executive’s Salary while employed by Company and shall be paid starting in the first payroll period occurring after the effectiveness of the Release (as defined below) and the expiration of any revocation period available to Executive thereunder. |
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| (iii) | Change of Control. If Company terminates Executive’s employment without Cause or if Executive resigns for Good Reason, in each case, within either (y) the three-month period before the effective date of a Change of Control or (z) the one-year period following the effective date of a Change of Control, Executive will be entitled to (A) the Accrued Benefits; (B) an aggregate amount equal to 12 months’ Salary (at the rate in effect on the date of termination); (C) payment of 100% of Executive’s target bonus for the year in which Executive’s employment was so terminated; (D) payment by Company each month, for a period starting on the date of termination and ending on 12 months following the date of termination, of 100% of the premium of any health insurance benefits Executive was receiving at the time of termination of Executive’s employment under a Company employee health insurance plan subject to COBRA, provided that Executive timely elects to have such COBRA coverage; and (E) accelerated vesting of 100% of any then unexpired, unvested Awards granted to Executive by Company (with such acceleration occurring on the later of the Change of Control or the termination of employment); provided, however, that for any Awards that include both a performance-based vesting condition (which may include the achievement of a specified stock price or market capitalization) and a time-based vesting condition or any Awards that vest solely upon the achievement of a performance-based vesting condition, no acceleration shall be provided unless such performance-based vesting condition has been satisfied as of the date of termination, except as specifically provided for in the Award Agreement entered into in respect of such Awards. The amounts set forth in clauses (B) and (C) of this Section 5(a)(iii) shall be paid in a lump sum in the first payroll period occurring after the effectiveness of the Release and the expiration of any revocation period available to Executive thereunder. |
Notwithstanding anything to the contrary in Section 5(a)(ii) or Section 5(a)(iii), if Company determines, in its sole discretion, that its payment of the COBRA Benefits would result in a violation of the nondiscrimination rules of Code Section 105(h)(2) or any statute or regulation of similar effect (including but not limited to the 2010 Patient Protection and Affordable Care Act, as amended by the 2010 Health Care and Education Reconciliation Act), then Company shall not be obligated to make the COBRA Benefits payments.
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(b) Release. Company’s obligation to make the payments and to provide the benefits under Sections 5(a)(ii) and 5(a)(iii) and to provide any other benefits contemplated herein is contingent upon:
| (i) | Executive’s execution of a release in a form reasonably acceptable to Company (the “Release”), which Release must be signed and any applicable revocation period with respect thereto must have expired by the 55th day following Executive’s termination of employment. The Release will not waive any of Executive’s rights, or obligations of Company, regarding: (1) any right to indemnification and/or contribution, advancement or payment of related expenses Executive may have pursuant to Company’s Bylaws or Articles of Incorporation or under any written indemnification or other agreement between Company and Executive, and/or under applicable law; (2) any rights Executive may have to insurance coverage under any directors and officers liability insurance, other insurance policies of Company, COBRA or any similar state law; (3) any claims for worker’s compensation, state disability or unemployment insurance benefits, or any other claims that cannot be released as a matter of applicable law; (4) rights to any vested benefits under any stock, compensation or other employee benefit plan of Company; (5) any rights Executive may have as an existing shareholder of Company; and (6) any claims arising after the effective date of the Release. Nothing in the Release or any other agreement between Executive and Company will prohibit or prevent Executive from providing truthful testimony or otherwise responding accurately and fully to any question, inquiry or request for information or documents when required by legal process, subpoena, notice, court order or law (including, without limitation, in any criminal, civil, or regulatory proceeding or investigation), or as necessary in any action for enforcement or claimed breach of this Agreement or any other legal dispute with Company; and | |
| (ii) | Executive’s timely tendering a written resignation as a director, if serving as a director of Company, as provided in Section 7. |
(c) Section 280G of the Code.
| (i) | Notwithstanding anything in this Agreement to the contrary, if any payment, distribution, or other benefit provided by Company to or for the benefit of Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (collectively, the “Payments”), (x) constitute a “parachute payment” within the meaning of Section 280G of the Internal Revenue Code (the “Code”), and (y) but for this Section 5(c) would be subject to the excise tax imposed by Section 4999 of the Code or any similar or successor provision thereto (the “Excise Tax”), then the Payments shall be either: (A) delivered in full pursuant to the terms of this Agreement, or (B) delivered to such lesser extent as would result in no portion of the payment being subject to the Excise Tax, as determined in accordance with Section 5(c)(ii). | |
| (ii) | The determination of whether clause (A) or clause (B) of Section 5(c)(i) shall be given effect shall be made by Company on the basis of which of such clauses results in the receipt by Executive of the greater Net After-Tax Receipt (as defined herein) of the aggregate Payments. The term “Net After-Tax Receipt” shall mean the present value (as determined in accordance with Section 280G of the Code) of the payments net of all applicable federal, state and local income, employment, and other applicable taxes and the Excise Tax. | |
| (iii) | If clause (B) of Section 5(c)(i) is given effect, the reduction shall be accomplished in accordance with Section 409A of the Code and the following: first by reducing, on a pro rata basis, cash Payments that are exempt from Section 409A of the Code; second by reducing, on a pro rata basis, other cash Payments; and third by forfeiting any equity-based awards that vest and become payable, starting with the most recent equity-based awards that vest, to the extent necessary to accomplish such reduction. |
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| (iv) | Unless Company and Executive otherwise agree in writing, any determination required under this Section 5(c) shall be made by Company’s independent accountants or compensation consultants (the “Third Party”), and all such determinations shall be conclusive, final and binding on the parties hereto. Company and Executive shall furnish to the Third Party such information and documents as the Third Party may reasonably request in order to make a determination under this Section 5(c). Company shall bear all fees and costs of the Third Party with respect to all determinations under or contemplated by this Section 5(c). |
(d) Definitions. For purposes of this Section 5, the following definitions shall apply:
| (i) | “Affiliated Group” means (a) a Person and one or more other Persons in control of, controlled by, or under common control with such Person; and (b) two or more Persons who, by written agreement among them, act in concert to acquire Voting Securities entitling them to elect a majority of the directors of Company. | |
| (ii) | “Cause” means a termination of Executive’s employment based upon a finding by a majority of the Board of Directors, acting in good faith and based on its reasonable belief at the time, that Executive: (a) has refused to perform the explicitly stated or reasonably assigned lawful and material duties required by Executive’s position (other than by reason of a disability or analogous condition); (b) has committed or engaged in a material act of theft, embezzlement, dishonesty or fraud, a breach of confidentiality, an unauthorized disclosure or use of inside information, customer lists, trade secrets or other confidential information; (c) has breached a material fiduciary duty, or willfully and materially violated any other duty, law, rule, or regulation relating to the performance of Executive’s duties to Company or any material policy of Company; (d) has been convicted of, or pled guilty or nolo contendere to, misdemeanor involving moral turpitude or a felony; (e) has willfully and materially breached any of the provisions of any agreement with Company which causes material injury to Company; (f) has willfully engaged in unfair competition with, or otherwise willfully acted in a manner materially injurious to the reputation, business or assets of, Company; or (g) has improperly induced a vendor or customer to break or terminate any material contract with Company or induced a principal for whom Company acts as agent to terminate such agency relationship. “Cause” shall only exist if Company first provides Executive with written notice of any claimed ground for Cause and an opportunity to cure such ground, if curable, for 30 days. For purposes of this Agreement, no act or failure to act on Executive’s part will be considered “willful” unless it is done, or omitted to be done, by Executive intentionally, not in good faith and without reasonable belief that the action or omission was in the best interest of Company. |
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| (iii) | “Change of Control” means (a) the acquisition of Voting Securities of Company by a Person or an Affiliated Group entitling the holder thereof to elect a majority of the directors of Company; provided, that an increase in the amount of Voting Securities held by a Person or Affiliated Group who on the date of this Agreement beneficially owned (as defined in Section 13(d) of the Securities Exchange Act of 1934, as amended, and the regulations thereunder) more than 10% of the Voting Securities shall not constitute a Change of Control; and provided, further, that an acquisition of Voting Securities by one or more Persons acting as an underwriter in connection with a sale or distribution of such Voting Securities shall not constitute a Change of Control under this clause (a); (b) the sale of all or substantially all of the assets of Company; or (c) a merger or consolidation of Company with or into another corporation or entity in which the shareholders of Company immediately before such merger or consolidation do not own, in the aggregate, Voting Securities of the surviving corporation or entity (or the ultimate parent of the surviving corporation or entity) entitling them, in the aggregate (and without regard to whether they constitute an Affiliated Group) to elect a majority of the directors or persons holding similar powers of the surviving corporation or entity (or the ultimate parent of the surviving corporation or entity). | |
| (iv) | “Disability” means Executive’s inability (as determined by the Board of Directors) to perform the essential functions of Executive’s job responsibilities for a period of 180 days in the aggregate in any 12 month period. | |
| (v) | “Good Reason” means the occurrence of any of the following events or circumstances without Executive’s written consent: (a) a material diminution in Executive’s base compensation; (b) a material diminution in Executive’s authority, duties or responsibility; (c) a material change in the principal geographic location at which Executive performs services to Company; (d) any requirement that Executive engage in any illegal conduct; or (e) a material breach by Company of this Agreement or any other material written agreement between Executive and Company. “Good Reason” shall only exist if Executive first provides Company with written notice of any claimed ground for Good Reason within 30 days of the first occurrence of such ground and Company has an opportunity to remedy such ground for 30 days after receipt of such notice. Executive must resign employment within 30 days after the Company’s remedy period has elapsed without remedy or else Executive will have waived Good Reason with respect to such ground. | |
| (vi) | “Person” means any natural person or any corporation, partnership, limited liability company, trust, unincorporated business association, or other entity. | |
| (vii) | “Voting Securities” means shares of capital stock or other equity securities entitling the holder thereof to regularly vote for the election of directors (or for person performing a similar function if the issuer is not a corporation), but does not include the power to vote upon the happening of some condition or event which has not yet occurred. |
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6. Turnover of Property and Documents on Termination. Executive agrees that on or before termination of Executive’s employment, Executive will return to Company all equipment and other property belonging to Company, and all originals and copies of confidential information (in any and all media and formats, and including any document or other item containing confidential information) in Executive’s possession or control, and all of the following (in any and all media and formats, and whether or not constituting or containing confidential information) in Executive’s possession or control: (a) lists and sources of customers; (b) proposals or drafts of proposals for any research grant, research or development project or program, marketing plan, licensing arrangement, or other arrangement with any third party; (c) reports, notations of Executive, laboratory notes, specifications, and drawings pertaining to the research, development, products, patents, and technology of Company; (d) any and all intellectual property developed by Executive during the course of employment; and (e) the manual and memoranda related to the Policies. To the extent there is a conflict between this Section 6 and the Confidentiality and IP Agreement, the Confidentiality and IP Agreement shall control.
7. Resignation as a Director on Termination of Employment. If Executive’s employment by Company is terminated for any reason or for no reason, whether by way of resignation, Disability, or termination by Company with or without Cause, and if Executive is then a member of the Board of Directors, Executive shall within two business days (as defined below) after such termination of employment resign from the Board of Directors by delivering to Company a letter or other written communication addressed to the Board of Directors stating that Executive is resigning from the Board of Directors effective immediately. A “business day” shall be any day other than a Saturday, Sunday, or federal holiday on which federal offices are closed.
8. Arbitration. Except for injunctive proceedings against unauthorized disclosure of confidential information, any and all claims or controversies between Company and Executive, including but not limited to (a) those involving the construction or application of any of the terms, provisions, or conditions of this Agreement or the Policies; (b) all contract or tort claims of any kind; and (c) any claim based on any federal, state, or local law, statute, regulation, or ordinance, including claims for unlawful discrimination or harassment, shall be settled by arbitration in accordance with the then current Employment Dispute Resolution Rules of the American Arbitration Association. Judgment on the award rendered by the arbitrator(s) may be entered by any court having jurisdiction over Company and Executive. The location of the arbitration shall be San Diego, California. Unless Company or Executive mutually agree otherwise, the arbitrator shall be a retired judge selected from a panel provided by the American Arbitration Association, or the Judicial Arbitration and Mediation Service (JAMS). Company shall pay the arbitrator’s fees and costs. Executive shall pay for Executive’s own costs and attorneys’ fees, if any. If Company is a party to an arbitration proceeding it shall pay for its own costs and attorneys’ fees, if any. However, if any party prevails on a statutory claim which affords the prevailing party attorneys’ fees, the arbitrator may award reasonable attorneys’ fees and costs to the prevailing party.
EXECUTIVE UNDERSTANDS AND AGREES THAT THIS AGREEMENT TO ARBITRATE CONSTITUTES A WAIVER OF EXECUTIVE’S RIGHT TO A TRIAL BY JURY OF ANY MATTERS COVERED BY THIS AGREEMENT TO ARBITRATE.
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9. Severability. In the event that any of the provisions of this Agreement or the Policies shall be held to be invalid or unenforceable in whole or in part, those provisions to the extent enforceable and all other provisions shall nevertheless continue to be valid and enforceable as though the invalid or unenforceable parts had not been included in this Agreement or the Policies. In the event that any provision relating to a time period of restriction shall be declared by a court of competent jurisdiction to exceed the maximum time period such court deems reasonable and enforceable, then the time period of restriction deemed reasonable and enforceable by the court shall become and shall thereafter be the maximum time period.
10. Agreement Read and Understood. Executive acknowledges that Executive has carefully read the terms of this Agreement, that Executive has had an opportunity to consult with an attorney or other representative of Executive’s own choosing regarding this Agreement, that Executive understands the terms of this Agreement and that Executive is entering this Agreement of Executive’s own free will.
11. Complete Agreement, Modification. This Agreement is the complete agreement and understanding between Executive and Company pertaining to the subject matter of this Agreement. This Agreement supersedes and replaces the Former Agreement and all previous correspondence, promises, representations, and agreements, if any, either written or oral with respect to Executive’s employment by Company and any matter covered by this Agreement. No provision of this Agreement may be modified, amended, or waived except by a written document signed both by Executive and Company, and with respect to Company, with the express authorization of the Board of Directors or the Compensation Committee.
12. Governing Law. This Agreement shall be construed and enforced according to the laws of the State of California.
13. Assignability. This Agreement, and the rights and obligations of Executive and Company under this Agreement, may not be assigned by Executive. Company may assign any of its rights and obligations under this Agreement to any successor or surviving corporation, limited liability company, or other entity resulting from a merger, consolidation, sale of assets, sale of stock, sale of membership interests, or other reorganization, upon condition that the assignee shall assume, either expressly or by operation of law, all of Company’s obligations under this Agreement.
14. Survival. This Section 14 and the covenants and agreements contained in Sections 3, 4 and 6 of this Agreement shall survive termination of this Agreement and Executive’s employment.
15. Notices. Any notices or other communication required or permitted to be given under this Agreement shall be in writing and shall be sent by email, facsimile, certified mail, return receipt requested, or sent by next business day air courier service, or personally delivered to the party to whom it is to be given at the address of such party set forth on the signature page of this Agreement (or to such other address as the party shall have furnished in writing in accordance with the provisions of this Section 15), and shall be deemed delivered: a) upon personal delivery to the party to be notified; (b) on the date such notice is received from any reputable courier service that provides tracking and written verification of delivery; or (c) on the date on which such notice is delivered by certified mail, facsimile transmission or email, with confirmation that such facsimile transmission or email has been received and read.
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16. Section 409A Compliance.
(a) This Agreement is intended to comply with the provisions of Section 409A of the Code (“Section 409A”), and, to the extent practicable, this Agreement shall be interpreted and administered in a manner so that any amount or benefit payable hereunder shall be paid or provided in a manner that is either exempt from or compliant with the requirements of Section 409A and applicable Internal Revenue Service guidance and Treasury Regulations issued thereunder. Terms used in this Agreement shall have the meanings given such terms under Section 409A if, and to the extent required, in order to comply with Section 409A.
(b) For purposes of amounts payable under this Agreement, the termination of employment shall be deemed to be effective upon “separation from service” with Company, as defined under Section 409A and the guidance issued thereunder. To the extent any nonqualified deferred compensation payment to Executive (whether under this Agreement or otherwise) could be paid in one or more of Executive’s taxable years depending upon Executive completing certain employment-related actions (such as when Executive executes the Release), then any such payments will commence or occur in the later taxable year to the extent required by Section 409A.
(c) Notwithstanding anything to the contrary in this Agreement, to the extent required to avoid additional taxes and interest charged under Section 409A, if any of Company’s stock is publicly traded and Executive is deemed to be a “specified employee” as determined by Company for purposes of Section 409A, Executive agrees that any non-qualified deferred compensation payments due to Executive under this Agreement (or any other agreement) and which are payable as a result of Executive’s termination of employment that would otherwise have been payable at any time during the 6-month period immediately following such termination of employment shall not be paid prior to, and shall instead be payable in a lump sum on the first day of the 7th month following Executive’s separation from service (or, if Executive dies during such period, within 30 days after Executive’s death).
(d) Neither Company nor Executive shall have the right to accelerate or defer the delivery of, offset or assign any payment under this Agreement that constitutes “nonqualified deferred compensation” subject to Section 409A of the Code, except to the extent specifically permitted or required by Section 409A of the Code.
(e) If Executive is entitled to be paid or reimbursed for any taxable expenses under this Agreement, and such payments or reimbursements are includible in Executive’s federal gross taxable income, the amount of such expenses reimbursable in any one calendar year shall not affect the amount reimbursable in any other calendar year, and the reimbursement of an eligible expense must be made no later than December 31 of the year after the year in which the expense was incurred. No right of Executive to reimbursement of expenses under this Agreement shall be subject to liquidation or exchange for another benefit.
(f) Notwithstanding the foregoing, the tax treatment of the payments and benefits provided under this Agreement is not warranted or guaranteed. To the extent that this Agreement or any payment or benefit hereunder shall be deemed not to comply with Section 409A, neither Company, nor the Board of Directors, nor any member of the Compensation Committee, nor any of their successors shall be liable to Executive or to any other person for any taxes, interest, penalties or other monetary amounts owed by Executive as a result of the application of Section 409A or for reporting in good faith any amounts as subject thereto.
17. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which together shall be deemed to be one and the same instrument. This Agreement may be executed by facsimile, DocuSign® or by email exchange of a portable document format (“pdf”) data file, where such signature shall be valid and binding with the same force and effect as if such facsimile or such pdf file were an original thereof.
[Signatures to the Employment Agreement Are Found on the Following Page]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first above written.
| EXECUTIVE: | |
| /s/ Jill Ann Howe | |
| Jill Ann Howe | |
| 2173 Salk Avenue, Suite 200 | |
| Carlsbad, CA 92008 |
| COMPANY: | ||
| LINEAGE CELL THERAPEUTICS, INC. | ||
| By: | /s/ Brian M. Culley | |
| Brian Michael Culley | ||
| Chief Executive Officer | ||
| Lineage Cell Therapeutics, Inc | ||
| 2173 Salk Avenue, Suite 200 | ||
| Carlsbad, CA 92008 | ||
[Signature Page to the Employment Agreement]
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Exhibit A
Chief Financial Officer
SUMMARY OF ESSENTIAL FUNCTIONS:
As the highest-ranking financial executive at Lineage, the CFO will provide financial leadership and align business objectives with finance strategy to create value and growth. Responsible for ensuring compliance with all reporting obligations of a public company and serving as a strategic partner and financial advisor to the CEO and the board. The ideal candidate has extensive prior public biotech company experience, business leadership expertise, strong FP&A skills, and the foundational knowledge required to execute all accounting, audit and compliance, and operational aspects of the position.
JOB RESPONSIBILITIES:
| ● | Provide overall leadership, financial strategy, and proactive direction to the Company, including the raising and efficient deployment of capital resources. |
| ● | Provide advice and counsel on financial and operational matters to the CEO and Board of Directors. Lead scenario planning activities including preparation of complex analyses and modeling to guide decision-making in all matters operational, financial, and strategic. |
| ● | Work closely with the business development team on potential partnering opportunities and/or collaborations, including in-licensing, out-licensing, acquisitions and/or divestitures, and related diligence activities. |
| ● | Contribute to the strategic direction of the Company and collaborate with other senior management and the Board of Directors to develop, refine, and implement the Company’s strategic and operational plans. |
| ● | Participate actively in Board of Directors and Committee meetings; provide advice and counsel on matters pertaining to governance, corporate compliance, financing, and operations. |
| ● | Responsible, either directly or by managing staff, for all cash management, investments, insurance, budgeting, and financial reporting, helping to drive the Company’s financial strategy. |
| ● | Review the annual budget and periodic forecasts; ensure goal alignment across the Company. |
| ● | Manage key relationships with external auditors and tax advisors. |
| ● | Ensure the Finance Department maintains a high level of performance, productivity, and integrity; recruit and develop financial talent as necessary. |
| ● | Support the CEO and Investor Relations in the furtherance of corporate communications and shareholder engagement efforts, including capital raising activities. |
| A- 1 |
Exhibit B
Confidentiality and IP Agreement
| B- 1 |
Exhibit 10.21
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
neil d. ross, on behalf of himself and all others similarly situated,
Plaintiff,
v.
LiNEAGE CELL THERAPEUTICS, INC. f/k/a BioTime, Inc., Michael H. Mulroy, Alfred D. Kingsley, Richard T. LeBuhn, and Aditya Mohanty,
Defendants. |
) ) ) |
C.A. No. 2019-0822-LWW
|
STIPULATION
AND AGREEMENT OF
COMPROMISE AND SETTLEMENT
This Stipulation and Agreement of Compromise and Settlement, dated as of the date of the last signature below, is entered into by and among the Parties in the Action: (i) Plaintiff Neil D. Ross, on behalf of himself and all others similarly situated (“Plaintiff”); (ii) Defendant Lineage Cell Therapeutics, Inc. f/k/a BioTime, Inc. (“Lineage”); (iii) Defendant Michael H. Mulroy; (iv) Defendant Alfred D. Kingsley; (v) Defendant Richard T. LeBuhn; and (vi) Defendant Aditya Mohanty (collectively, “Defendants”). This Stipulation sets forth all of the terms of the Settlement and resolution of this matter and is intended by Plaintiff and Defendants to fully and finally release, resolve, remise, compromise, settle and discharge the Released Plaintiff’s Claims against the Released Defendant Persons (as defined herein) and the Released Defendants’ Claims against the Released Plaintiff Persons (as defined herein), subject to the approval of the Court of Chancery of the State of Delaware (the “Court”), without any admission or concession as to the merits of any claim or defense by the Parties. All terms herein with initial capitalization shall, unless defined elsewhere in this Stipulation, have the meanings ascribed to them in Paragraph 1 below.
WHEREAS, on November 7, 2018, Lineage and Asterias Biotherapeutics, Inc. (“Asterias”) entered into a merger agreement, pursuant to which Lineage would acquire all of the outstanding common stock of Asterias it did not own (the “Merger”), with each Asterias stockholder receiving 0.71 shares of BioTime common stock for every share of Asterias common stock (the “Merger Consideration”);
WHEREAS, on November 26, 2018, Plaintiff’s Counsel, on behalf of Plaintiff, served a demand for books and records on Asterias pursuant to 8 Del. C. § 220;
WHEREAS, in response to Plaintiff’s demand, Asterias made available for inspection various books and records concerning the Merger and other related issues;
WHEREAS, the Merger closed on March 8, 2019;
WHEREAS, on October 15, 2019, Plaintiff, on behalf of himself and all others similarly situated, filed his Verified Class Action Complaint challenging the Merger (the “Complaint”);
WHEREAS, on September 21, 2020, the Court ruled on Defendants’ motions to dismiss the Complaint (the “Motions”), denying the Motions as to Count I for Defendants Mulroy, Kingsley, LeBuhn, and Mohanty; denying the Motions as to Count II for Lineage; granting the Motions with prejudice as to Count I for defendants Andrew Arno, Don M. Bailey, and Stephen L. Cartt; granting the Motions as to Count III of the Complaint; granting the Motions without prejudice as to Count IV of the Complaint for defendant Lineage; and granting the Motions with prejudice as to Count IV of the Complaint for defendants Broadwood Capital, Inc., Broadwood Partners L.P., and Neal Bradsher;
WHEREAS, on October 30, 2020, the Defendants who remained in the case following resolution of the Motions answered the Complaint;
WHEREAS, on November 2, 2020, Plaintiff served Plaintiff’s First Set of Requests to Defendants for the Production of Documents;
WHEREAS, on March 10, 2021, Plaintiff served Plaintiff’s Second Set of Requests for Production of Documents to Defendants;
WHEREAS, on March 11, 2021, Defendants Mulroy, Kingsley, LeBuhn, and Mohanty served the Director Defendants’ First Set of Requests for Production of Documents Directed to Plaintiff and the Director Defendants’ First Set of Interrogatories Directed to Plaintiff;
WHEREAS, on June 9, 2021, Plaintiff filed a Motion to Compel Compliance with Subpoena Duces Tecum and Ad Testificandum Directed to Broadwood Capital, Inc. (the “Motion to Compel”);
WHEREAS, on July 27, 2021, following the completion of briefing, the Court held oral argument on the Motion to Compel and granted the Motion to Compel;
WHEREAS, on August 5, 2021, the Court granted the Stipulation and Proposed Scheduling Order, which scheduled trial for October 17-21, 2022;
WHEREAS, on November 23, 2021, the Court granted the Amended Stipulation and Proposed Scheduling Order, which did not alter the trial date but modified various pretrial dates, and, among other things, set opening expert reports to be exchanged by the parties on May 6, 2022 and for expert discovery, including expert depositions, to complete by July 8, 2022;
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WHEREAS, during discovery, the Parties corresponded and met and conferred about various discovery issues, including the nature and scope of productions, the identification of document custodians, implementation of search terms, and privilege assertions, and approximately 200,000 pages of documents were produced;
WHEREAS, Plaintiff served Subpoenas Duces Tecum and Ad Testificandum on third parties Andrew Arno, Howard Scher, Stephen L. Cartt, Natale Ricciardi, Don M. Bailey, Maxim Group LLC, Raymond James & Associates, Inc., and Broadwood Capital, Inc.;
WHEREAS, Plaintiff served Subpoenas Duces Tecum on third parties Laidlaw & Company (UK) LTD, H.C. Wainwright & Co., LLC, and Chardan Capital, LLC;
WHEREAS, Plaintiff served Subpoenas Ad Testificandum on third parties James Knight, Bradford Hoffman, Stuart Barich, Russell Skibsted, and Ryan Chavez;
WHEREAS, on February 1, 2022, the Parties attended a virtual mediation session with Robert A. Meyer, Esq. of JAMS. Mr. Meyer has more than a dozen years’ experience mediating complex business disputes, including numerous securities fraud class actions. In advance of mediation, the Parties submitted mediation statements to the mediator;
WHEREAS, the Parties were unable to reach a settlement at the mediation session;
WHEREAS, between February 25 and April 6, 2022, Plaintiff deposed the following individuals: Prior Defendant and former Asterias director Don M. Bailey; Defendant and former Asterias director Richard T. LeBuhn; former Asterias Chief Financial Officer and General Counsel Ryan Chavez; Defendant,former Asterias director and former Lineage director and Chief Executive Officer Aditya Mohanty; Defendant, former Asterias Chief Executive Officer, former Asterias director and Lineage director Michael H. Mulroy; Defendant and former Asterias director and Lineage director Alfred D. Kingsley; Stuart Barich, Managing Director of Raymond James Financial, Inc.; and Bradford Hoffman, Managing Director of Maxim Group, LLC. The parties also scheduled the depositions of former BioTime Chief Financial Officer Russell Skibsted; former BioTime Senior Vice President and Head of Corporate Development James Knight; and Chief Executive Officer of Lineage Brian Culley to take place in April 2022; but which were postponed in light of the Parties’ agreement in principle to resolve this litigation as indicated below;
WHEREAS, on April 4, 2022, Defendants deposed Plaintiff Neil D. Ross;
WHEREAS, on April 5, 2022, Plaintiff advised Defendants that he intended to move to certify a class using a class definition substantively the same as the Class defined herein;
WHEREAS, on April 7, 2022, Defendants advised Plaintiff that they did not intend to contest class certification, while reserving all rights;
WHEREAS, on April 25, 2022, the parties submitted a Stipulation and Proposed Order Governing Class Certification which stated that Defendants, while reserving all rights, did not intend to contest class certification, which the Court entered the same day;
WHEREAS, on or about April 27, 2022, following extensive negotiations, the Parties agreed in principle to resolve this litigation subject to the terms set forth in this Stipulation;
WHEREAS, Plaintiff and Plaintiff’s Counsel believe the Action has merit, and Plaintiff’s entry into this Stipulation and the Settlement is not intended to be and shall not be construed as an admission or concession concerning the relative strength or merit of the claims alleged in the Action;
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WHEREAS, the Defendants and Prior Defendants have denied, and continue to deny, any and all allegations of wrongdoing or liability asserted in the Action, including, without limitation, that any of the Defendants or Prior Defendants breached their fiduciary duties, or aided and abetted a breach of fiduciary duty, owed to Asterias or its stockholders in connection with the Merger;
WHEREAS, the Defendants and Prior Defendants who owed fiduciary duties to Asterias and its stockholders have further asserted, and continue to assert, that at all relevant times, they acted in good faith and in a manner that they reasonably believed to be in the best interests of Asterias and its stockholders;
WHEREAS, Defendants are entering into this Stipulation and the Settlement solely to eliminate the uncertainty, distraction, disruption, burden, risk, and expense of further litigation; and
NOW, THEREFORE, IT IS HEREBY STIPULATED, CONSENTED TO AND AGREED, by Plaintiff, for himself and on behalf of the Class, and the Defendants that, subject to the approval of the Court and pursuant to Delaware Court of Chancery Rule 23, for the good and valuable consideration set forth herein and conferred on Plaintiff and the Class, the Action against the Defendants shall be finally and fully settled, compromised and dismissed, on the merits and with prejudice, and that the Released Plaintiff’s Claims shall be finally and fully compromised, settled, released, discharged and dismissed with prejudice as against the Released Defendant Persons, and that the Released Defendants’ Claims shall be finally and fully compromised, settled, released, discharged and dismissed with prejudice as against the Released Plaintiff Persons, in the manner set forth herein
A. Definitions
1. In addition to the terms defined elsewhere in this Stipulation, the following capitalized terms, used in this Stipulation, shall have the meanings specified below:
a. “Action” means the Action pending in the Court, styled Ross v. Lineage Cell Therapeutics, Inc., et al., C.A.No. 2019-0822-LWW.
b. “Administrator” means the firm retained by Plaintiff to disseminate the Settlement Notice, oversee the administration of the Settlement and distribution of the Settlement Amount, and such other administrative functions as are required under the Settlement.
c. “Claims” mean any and all manner of claims, demands, rights, liabilities, losses, obligations, duties, damages, diminutions in value, costs, debts, expenses, interest, penalties, fines, sanctions, fees, attorneys’ fees, expert or consulting fees, actions, potential actions, causes of action, suits, agreements, judgments, decrees, matters, issues and controversies of any kind, nature or description whatsoever, whether known or unknown, disclosed or undisclosed, accrued or unaccrued, apparent or not apparent, foreseen or unforeseen, matured or not matured, suspected or unsuspected, liquidated or not liquidated, fixed or contingent, including Unknown Claims, which now exist, or heretofore or previously existed, whether direct, derivative, individual, class, representative, legal, equitable or of any other type, or in any other capacity.
d. “Class” means all record and beneficial holders of Asterias common stock as of the date of the consummation of the Merger who received the Merger Consideration, together with their respective successors and assigns. Excluded from the Class are: (a) Defendants and Prior Defendants, and their immediate family members, affiliates, subsidiaries, directors or officers, limited partners, legal representatives, heirs, successors, transferees, and assigns, and (b) any entity in which any Defendant has had a direct or indirect controlling interest.
e. “Class Member” means a member of the Class.
f. “Defendants” means Lineage Cell Therapeutics, Inc. f/k/a BioTime, Inc., Michael H. Mulroy, Alfred D. Kingsley, Richard T. LeBuhn, and Aditya Mohanty.
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g. “Defendants’ Counsel” means the law firms of Cooley LLP and Morris, Nichols, Arsht, and Tunnell LLP on behalf of Lineage Cell Therapeutics, Inc., and Skadden, Arps, Slate, Meagher & Flom LLP on behalf of Michael H. Mulroy, Alfred D. Kingsley, Richard T. LeBuhn, and Aditya Mohanty.
h. “Effective Date” means the first business day following the date the Judgment becomes Final.
i. “Final,” when referring to the Judgment, means (1) entry of the Judgment or (2) if there is an objection to the Settlement, the expiration of any time for appeal or review of the Judgment, or, if any appeal is filed and not dismissed or withdrawn, issuance of a decision upholding the Judgment on appeal in all material respects, which is no longer subject to review upon appeal or other review, and the expiration of the time for the filing of any petition for reargument, appeal or review of the Judgment or any order affirming the Judgment; provided, however, that any disputes or appeals relating solely to the amount, payment or allocation of attorneys’ fees, costs and expenses shall have no effect on finality for purposes of determining the date on which the Judgment becomes Final and shall not otherwise prevent, limit or otherwise affect the Judgment, or prevent, limit, delay or hinder entry of the Judgment.
j. “Immediate Families” means an individual’s children, stepchildren, and spouse. In this paragraph, “spouse” shall mean a husband, a wife, or a partner in a state-recognized domestic partnership or civil union.
k. “Judgment” means the Order and Final Judgment to be entered in the Action in all material respects in the form attached as Exhibit D hereto, including a determination that the terms and conditions of the issuance of the Settlement Stock is fair to the Class Members.
l. “Merger” means the merger between BioTime, Inc. and Asterias Biotherapeutics, Inc. (“Asterias”) announced on November 8, 2018.
m. “Net Settlement Amount” means the Settlement Amount as defined herein less any fee and expense Awards, Notice Costs, and costs for the administration and distribution of the Settlement Amount.
n. “Party” means any one of, and “Parties” means all of, the parties to this Stipulation, namely, the Defendants and Plaintiff, on behalf of himself and the Class.
o. “Plaintiff’s Counsel” means the law firms of Wolf Popper LLP and Long Law LLC.
p. “Prior Defendants” means Broadwood Capital, Inc., Broadwood Partners, L.P., Neal C. Bradsher, Don M. Bailey, Andrew Arno, and Stephen L. Cartt.
q. “Released Defendant Persons” means all persons and entities named as a Defendant or a Prior Defendant in the Action or that could have been named as a Defendant in the Action, including, without limitation, the past and present officers and members of the board of directors of Lineage or Asterias, and any and all of the respective current and former employers, parent entities, controlling persons, owners, members, co-investors, lenders, principals, affiliates, or subsidiaries of any of the foregoing, and each and all of the respective past or present officers, directors, managers, partners, limited partners, stockholders, representatives, employees, attorneys, financial or investment advisors, consultants, accountants, investment bankers, commercial bankers, agents, heirs, executors, trustees, personal representatives, estates, administrators, predecessors, successors, assigns, insurers, and reinsurers of any of the foregoing, and such other persons that are specifically identified in the Settlement.
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r. “Released Defendants’ Claims” means any Claims that could have been asserted in the Action by Defendants against any of the Released Plaintiff Persons, which arise out of the institution, prosecution, settlement or dismissal of the Action, provided, however, that (i) the Released Defendants’ Claims shall not include claims to enforce the Settlement and (ii) nothing herein shall release or otherwise affect any rights between or among Defendants and/or their insurance carriers, including indemnification and contribution.
s. “Released Plaintiff Persons” means Plaintiff and the Class and their heirs, estates, executors, trustees, successors and assigns, and Plaintiff’s Counsel.
t. “Released Plaintiff’s Claims” means any Claims that (1) were alleged, asserted, set forth, or claimed in the Action against the Defendants and/or Prior Defendants; or (2) could have been alleged, asserted, set forth or claimed in the Action or in any other action or in any other court, tribunal, or proceeding by Plaintiff or any other members of the Class individually, or derivatively on behalf of Asterias or as a member of the Class, which are based upon, arise from or in any way relate to (i) the Merger (or relate to or arise as a result of any of the events, acts or negotiations related thereto); (ii) Asterias’s efforts to obtain financing or considerations or alternative transactions or courses of action in connection with the process leading up to the Merger; and (iii) claims that were or could have been alleged, asserted, set forth, claimed, embraced, involved, or referred to in, or related to the conduct described in the complaint filed in the Action. Released Plaintiff’s Claims shall not include claims arising from events occurring after the closing of the Merger so long as they could not have been asserted in the Action. Released Plaintiff’s Claims shall not include claims to enforce the Settlement.
u. “Settlement” means the settlement contemplated by this Stipulation.
v. “Settlement Amount” means $10.65 million. Nothing in this Stipulation shall have an effect on the respective rights and obligations between or among Defendants or their respective insurance carriers, or upon any separate agreements concerning the claims, defenses, debts, obligations or payments between or among Defendants.
w. “Settlement Fund” means a fund created for the benefit of the Class that contains the monies deposited into the Settlement Fund, the Settlement Stock issued in accordance with Paragraph 2 hereof, any residual monies held in the Settlement Fund, and any interest or income earned thereon.
x. “Settlement Hearing” means the hearing to be held by the Court to determine whether the proposed Settlement should be approved as fair, reasonable and adequate, including regarding the issuance of the Settlement Stock under the exemption provided for in Section 3(a)(10) of the Securities Act of 1933, as amended (“Section 3(a)(10)”); whether Plaintiff and Plaintiff’s Counsel have adequately represented the Class; whether any objections to the Settlement should be overruled; whether the Action should be dismissed with prejudice as against the Defendants; whether to fully, finally and forever, release, settle and discharge the Released Defendant Persons from and with respect to every one of the Released Plaintiff’s Claims; whether a Judgment approving the Settlement should be entered in accordance with the terms of this Stipulation; and whether and in what amount any award of attorneys’ fees and expenses should be paid to Plaintiff’s Counsel.
y. “Settlement Stock” means up to $3,530,000 of unrestricted Lineage common stock, determined as set forth in Paragraph 2.b(i).
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z. “Unknown Claims” means any Released Plaintiff’s Claims that Plaintiff, or any other Class Members, do not know or suspect to exist in his, her or its favor at the time of the release of the Released Plaintiff’s Claims, and any Released Defendants’ Claims that any Defendant does not know or suspect to exist in his or its favor at the time of the release of the Released Defendants’ Claims, which, if known by him, her or it, might have affected his, her or its decision(s) with respect to the Settlement. With respect to any and all Released Plaintiff’s Claims and Released Defendants’ Claims, the Parties stipulate and agree that, upon the Effective Date of the Settlement, the Parties shall expressly waive, and each of the Class Members shall be deemed to have, and by operation of the Judgment shall have expressly waived, relinquished and released any and all provisions, rights, and benefits conferred by any law of any state or territory of the United States, or principle of common law or foreign law, which is similar, comparable, or equivalent to California Civil Code §1542, which provides:
A general release does not extend to claims that the creditor or releasing party does not know or suspect to exist in his or her favor at the time of executing the release and that, if known by him or her, would have materially affected his or her settlement with the debtor or released party.
The Parties acknowledge, and the other Class Members by operation of law are deemed to acknowledge, that they may discover facts in addition to or different from those now known or believed to be true with respect to the Released Plaintiff’s Claims and the Released Defendants’ Claims, but that it is the intention of Plaintiff and Defendants, and by operation of law the other Class Members, to completely, fully, finally and forever extinguish any and all Released Plaintiff’s Claims and Released Defendants’ Claims, known or unknown, suspected or unsuspected, contingent or non-contingent, accrued or unaccrued, which now exist or heretofore have existed, upon any theory of law or equity, from the beginning of time through the date of execution of this Stipulation, without regard to the subsequent discovery or existence of such different or additional facts. Plaintiff and Defendants also acknowledge, and the other Class Members by operation of law are deemed to acknowledge, that the inclusion of “Unknown Claims” in the definition of the Released Plaintiff’s Claims and the Released Defendant’s Claims is separately bargained for and is a key element of the Settlement.
B. Settlement Consideration
2. In consideration for the full and final release, settlement and discharge of any and all Released Plaintiff’s Claims against the Released Defendant Persons, the Defendants agree to pay the Settlement Amount as follows:
a. Within ten (10) business days after execution of this Stipulation, and subject to the last sentence of this paragraph, the Defendants shall pay and/or cause their directors and officers (“D&O”) insurers to pay an amount in cash equal to the Administrator’s estimate for the cost of Notice of the Settlement, but in no event more than $50,000 into the Settlement Fund (the “Notice Cost”). Lineage and/or Defendants’ D&O insurers will fund the Notice Cost. If the Court does not approve the Settlement or the Judgment does not become Final for any reason, the Released Plaintiff Persons shall not be responsible for repaying any Notice Costs to Defendants. For the avoidance of doubt, Individual Defendants Michael H. Mulroy, Alfred D. Kingsley, Richard T. LeBuhn and Aditya Mohanty (as opposed to their insurers or Lineage) will not be responsible for personally funding, contributing to, or indemnifying any part of the Notice Cost.
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b. Within ten (10) business days after the Court enters the Judgment, Lineage shall transfer the Settlement Stock to the Settlement Fund. Up to the time of issuance, Lineage may elect, in its sole discretion, to pay some or all of the Settlement Stock obligation in cash in lieu of stock. The number of shares constituting the Settlement Stock shall be determined and transferred as follows:
(i) The valuation of the Settlement Stock for purposes of determining the number of shares constituting the Settlement Stock will be based on the volume-weighted average closing price (“VWAP”) for the twenty (20) trading days immediately preceding the last two trading days before the Settlement Stock is transferred to the Settlement Fund.
(ii) Should Plaintiff’s Counsel decide, after the transfer of the Settlement Stock into the Settlement Fund, to sell any of the Settlement Stock, they will limit daily sales of the Settlement Stock to 10% of the daily trading volume of Lineage common stock as averaged over the previous ten (10) trading days.
(iii) The Settlement Stock shall be duly and validly issued, uncertificated, fully paid, non-assessable and free from all liens and encumbrances, and the Parties stipulate the Settlement Stock has been issued under an exemption from registration provided by Section 3(a)(10). Lineage shall issue the Settlement Stock without any restrictive legend, and the Settlement Stock shall be freely and publicly tradeable without the need to obtain any opinions of counsel or permission of Lineage that the stock is unrestricted. Defendants will advise the Court that Lineage will rely on the Section 3(a)(10) exemption based on the Court’s approval of the Settlement.
c. Within ten (10) business days after the Court enters the Judgment, and subject to the last sentence of this paragraph, the Defendants shall pay and/or cause their D&O insurers to pay into the Settlement Fund cash equal to the Settlement Amount minus the Settlement Stock and the Notice Cost previously paid. Lineage and/or Defendants’ D&O insurers will fund the Settlement Amount. For the avoidance of doubt, Individual Defendants Michael H. Mulroy, Alfred D. Kingsley, Richard T. LeBuhn and Aditya Mohanty (as opposed to their insurers or Lineage) will not be responsible for personally funding, contributing to, or indemnifying any part the Settlement Amount. For the avoidance of doubt, Plaintiff may terminate the Settlement if Defendants fail to make the payment described in this subparagraph and in the amount and within the timeframe set forth in this subparagraph.
3. Following the Effective Date, the Net Settlement Amount will be disbursed by the Administrator according to the Plan of Allocation (Ex. C), provided it is approved by the Court. Defendants shall not object to the Plan of Allocation and shall have no input, responsibility or liability for any claims, payments or determinations by the Administrator in respect of Class Member claims for payment under this Settlement, or any other use of the Settlement Fund, including for Taxes, Tax Expenses, and the fee and expense awards. Following the disbursement contemplated in the first sentence of this paragraph, any balance which still remains in the Net Settlement Fund shall escheat to the State of Delaware. Defendants shall provide information to Plaintiff concerning the number of shares held by Released Defendant Persons and where and how the shares were held to ensure no Released Defendant Person is paid any of the Settlement Amount.
4. The Notice Cost will be borne by the Class and funded out of the Settlement Fund. Lineage shall cooperate with Plaintiff in providing the Notice, including, but not limited to, providing contact and shareholding information of Class Members to the extent available to Lineage.
5. Expenses of the Administrator, and any other cost of administration and distribution of the Settlement Amount (including the costs, if any, associated with escheat) shall be paid out of the Settlement Fund.
6. The funds in the Settlement Fund may be invested in instruments backed by the full faith and credit of the United States Government or fully insured by the United States Government or an agency thereof, or if the yield on such instruments is negative, in an account fully insured by the United States Government or an agency thereof. The Settlement Fund shall bear all risks related to investment of funds in the Settlement Fund.
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7. The Settlement Fund shall be deemed and considered to be in custodia legis of the Court, and shall remain subject to the jurisdiction of the Court, until such time as such funds shall be distributed pursuant to this Stipulation and/or further order(s) of the Court.
C. Scope of the Settlement
8. Upon the entry of the Judgment, the Action shall be dismissed with prejudice, on the merits and without costs (except as provided herein).
9. Upon the Effective Date, the Plaintiff and all members of the Class shall thereupon fully, finally and forever, release, settle and discharge the Released Defendant Persons from and with respect to every one of the Released Plaintiff’s Claims, and shall thereupon be forever barred and enjoined from commencing, instituting, prosecuting, or continuing to prosecute any Released Plaintiff’s Claims against any of the Released Defendant Persons.
10. Upon the Effective Date, each of the Defendants shall thereupon fully, finally and forever, release, settle and discharge the Released Plaintiff Persons from and with respect to every one of the Released Defendants’ Claims, and shall thereupon be forever barred and enjoined from commencing, instituting or prosecuting any of the Released Defendants’ Claims against any of the Released Plaintiff Persons.
11. The obligations incurred pursuant to this Stipulation shall be in full and final disposition of the Action, the Released Plaintiff’s Claims and the Released Defendants’ Claims. It is the intention of the Parties that the Settlement eliminate all further risk and liability relating to the Released Plaintiff’s Claims and the Released Defendants’ Claims, and that the Settlement shall be a final and complete resolution of all disputes asserted or which could be or could have been asserted with respect to the Released Plaintiff’s Claims and the Released Defendants’ Claims; provided, however, that nothing herein shall release or otherwise affect any claims for indemnity or contribution between Defendants and their insurance carriers.
D. Submission of the Settlement to the Court for Approval
12. As soon as practicable after this Stipulation has been executed, Plaintiff and the Defendants shall (1) jointly apply to the Court for entry of an Order substantially in the form attached hereto as Exhibit A (the “Scheduling Order”), providing for, among other things: (a) the dissemination of the Notice of Pendency and Proposed Settlement of Class Action (the “Notice”), substantially in the form attached hereto as Exhibit B, which references the Plan of Allocation set forth in Exhibit C; and (b) the scheduling of the Settlement Hearing to consider: (i) the proposed Settlement, (ii) the joint request of the Parties that the Judgment be entered in all material respects in the form attached hereto as Exhibit D, (iii) Plaintiff’s Counsel’s fee and expense applications, and (iv) any objections to any of the foregoing; and (2) take all reasonable and appropriate steps to seek and obtain entry of the Scheduling Order. The Parties shall jointly request at the Settlement Hearing that the Judgment be entered, and the Parties shall take all reasonable and appropriate steps to obtain Final entry of the Judgment in all material respects in the form attached hereto as Exhibit D.
E. Conditions of Settlement
13. This Settlement shall be subject to the following conditions, which the Parties shall use their best efforts to achieve:
a. the Court enters the Scheduling Order in all material respects in the form attached hereto as Exhibit A;
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b. the Court enters the Judgment in all material respects in the form attached hereto as Exhibit D and the Judgment becomes Final. For the avoidance of doubt, the scope of the Released Plaintiff’s Claims and the Released Defendants’ Claims are material terms of this Stipulation;
c. the Effective Date shall have occurred; and
d. the Parties have complied with their obligations set forth in the Stipulation.
F. Attorneys’ Fees and Expenses
14. Plaintiff’s Counsel reserves the right to petition the Court for an award of attorneys’ fees of no more than $2,662,500 in connection with its role in causing the Settlement and expenses and costs incurred in connection with the Action not to exceed $125,000. Any award to Plaintiff’s Counsel for fees and expenses shall be determined by the Court.
15. Any fee and expense award pursuant to any application shall be paid exclusively out of, and not be in addition to, the Settlement Amount.
16. The disposition of any fee application is not a material term of this Stipulation, and it is not a condition of this Stipulation that such applications be granted. The fee application may be considered separately from the proposed Settlement. Any disapproval or modification of the fee application by the Court or on appeal shall not affect or delay the enforceability of this Stipulation, provide any of the Parties with the right to terminate the Settlement, or affect or delay the binding effect or finality of the Judgment and the release of the Released Plaintiff’s Claims and Released Defendants’ Claims. Final resolution of the fee application shall not be a condition to the dismissal, with prejudice, of the Action or effectiveness of the releases of the Released Plaintiff’s Claims. The payment of any fee and expense awards shall be made without waiver of the right of any Defendant to pursue claims against insurance carriers for such sum.
17. Plaintiff’s Counsel intends to apply to the Court for a service award to Plaintiff in an amount not to exceed $5,000, which amount shall be paid from any amount awarded by the Court from the fee and expense award awarded to Plaintiff’s Counsel. The Defendants and the Released Defendant Persons shall have no input into or responsibility or liability for the allocation by Plaintiff’s Counsel of any Fee and Expense Award.
G. Taxes
18. The Parties agree to treat the Settlement Fund as being at all times a “qualified settlement fund” within the meaning of Treas. Reg. § 1.468B-1. In addition, the Administrator shall timely make such elections as necessary or advisable to carry out the provisions of this Section H, including, if necessary, the “relation-back election” (as defined in Treas. Reg. § 1.468B-10)(2)) back to the earliest permitted date. Such elections shall be made in compliance with the procedures and requirements contained in such Treasury regulations promulgated under § 1.468B of the Internal Revenue Code of 1986, as amended (the “Code”). It shall be the responsibility of the Administrator to timely and properly prepare and deliver the necessary documentation for signature by all necessary parties, and thereafter to cause the appropriate filing to occur.
19. For the purpose of § 1.468B of the Code and the Treasury regulations thereunder, the Administrator shall be designated as the “administrator” of the Settlement Fund. The Administrator shall timely and properly file all informational and other tax returns necessary or advisable with respect to the Settlement Fund (including, without limitation, the returns described in Treas. Reg. § 1.468B-2(k)). Such returns (as well as the election described in Paragraph 21) shall be consistent with this Section G and in all events shall reflect that all Taxes, as defined below, (including any estimated Taxes, interest or penalties) on the income earned by the Settlement Fund shall be paid out of the Settlement Fund.
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20. All: (a) taxes (including any estimated taxes, interest or penalties) arising with respect to the income earned by the Settlement Fund, including any taxes or tax detriments that may be imposed upon Defendants or Released Defendant Persons with respect to any income earned by the Settlement Fund for any period during which the Settlement Fund does not qualify as a “qualified settlement fund” for federal or state income tax purposes (“Taxes”); and (b) expenses and costs incurred in connection with the operation and implementation of this Section G (including, without limitation, expenses of tax attorneys and/or accountants and mailing and distribution costs and expenses relating to filing (or failing to file) the returns described in this Section G) (“Tax Expenses”), shall be paid out of the Settlement Fund. In no event shall Defendants or Released Defendant Persons have any responsibility for or liability with respect to Taxes or Tax Expenses. Further, Taxes and Tax Expenses shall be treated as, and considered to be, a cost of administration of the Settlement Fund and shall be timely paid by Plaintiff’s Counsel out of the Settlement Fund without further consent of the Defendants, or prior order from the Court, and Plaintiff’s Counsel shall be obligated (notwithstanding anything herein to the contrary) to withhold from distribution to Class Members any funds necessary to pay such amount, including the establishment of adequate reserves for any Taxes and Tax Expenses (as well as any amounts that may be required to be withheld under Treas. Reg. § 1.468B-2(1)(2)); neither Defendants nor the Released Defendant Persons are responsible therefor nor shall they have any liability with respect thereto.
H. Termination of Settlement; Effect of Termination
21. The Parties shall each have the right to terminate the Settlement and this Stipulation by providing written notice of their election to do so to the other Parties within ten (10) business days of: (a) the Court’s declining to enter the Scheduling Order in any material respect; (b) the Court’s declining to enter the Judgment in any material respect; (c) modification or reversal of the Judgment in any material respect on or following appellate review, remand, collateral attack or other proceedings; or (d) failure to satisfy any of the other conditions of Section E (other than the occurrence of the Effective Date). Neither a modification nor a reversal on appeal of any fee and expense awards shall be deemed a material modification of the Judgment or this Stipulation.
22. If the Effective Date does not occur, or if this Stipulation is disapproved, canceled or terminated pursuant to its terms, or the Settlement otherwise does not become Final for any reason, Plaintiff and the Defendants shall be deemed to have reverted to their respective litigation status immediately prior to entering into the Settlement; they shall negotiate a new trial schedule in good faith; and they shall proceed as if this Stipulation had not been executed and the related orders had not been entered, and in that event all of their respective claims and defenses as to Plaintiff’s claims shall be preserved without prejudice.
I. Effect of Settlement
23. The Defendants deny any and all allegations of wrongdoing, fault, liability or damage in the Action.
24. Plaintiff and the Defendants covenant and agree that neither this Stipulation, nor the fact or any terms of the Settlement, or any communications relating thereto, is evidence, or an admission or concession by Plaintiff or the Defendants or their counsel, or any Class Member, or any other Released Defendant Persons or Released Plaintiff Persons, of any fault, liability or wrongdoing whatsoever, as to any facts or claims alleged or asserted in the Action, or any other actions or proceedings, or as to the validity or merit of any of the claims or defenses alleged or asserted in any such action or proceeding.
25. This Stipulation is not a finding or evidence of the validity or invalidity of any claims or defenses in the Action, any wrongdoing by Plaintiff, the Defendants, any Class Member or other Released Defendant Persons or Released Plaintiff Persons, or any damages or injury to Plaintiff, the Defendants, any Class Member or other Released Defendant Party or Released Plaintiff Persons.
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26. Neither this Stipulation, nor any of the terms and provisions of this Stipulation, nor any of the negotiations or proceedings in connection therewith, nor any of the documents or statements referred to herein or therein, nor the Settlement, nor the fact of the Settlement, nor the Settlement proceedings, nor any statements in connection therewith, (a) shall (i) be argued to be, used or construed as, offered or received in evidence as, or otherwise constitute an admission, concession, presumption, proof, evidence, or a finding of any liability, fault, wrongdoing, injury or damages, or of any wrongful conduct, acts or omissions on the part of any of the Released Defendant Persons or Released Plaintiff Persons, or of any infirmity of any defense, or of any damage to Plaintiff or any other Class Member, or (ii) otherwise be used to create or give rise to any inference or presumption against any of the Released Defendant Persons or Released Plaintiff Persons concerning any fact or any purported liability, fault, or wrongdoing of the Released Defendant Persons or Released Plaintiff Persons or any injury or damages to any person or entity, or (b) shall otherwise be admissible, referred to or used in any proceeding of any nature, for any purpose whatsoever; provided, however, that the Stipulation and Judgment may be introduced in any proceeding subject to Rule 408 of the Federal Rules of Evidence and any and all other state law corollaries thereto, whether in the Court or otherwise, as may be necessary to argue and establish that the Stipulation and Judgment have res judicata, collateral estoppel or other issue or claim preclusion effect or to otherwise consummate or enforce the Settlement and Judgment or to secure any insurance rights or proceeds of any of the Released Defendant Persons or Released Plaintiff Persons or as otherwise required by law.
J. Miscellaneous Provisions
27. All of the Exhibits attached hereto are material and integral parts hereof and shall be incorporated by reference as though fully set forth herein.
28. This Stipulation may not be amended or modified, nor may any of its provisions be waived, except by a written instrument signed by counsel for Plaintiff and the Defendants or their successors-in-interest.
29. The headings herein are used for the purpose of convenience only and are not meant to have legal effect.
30. Plaintiff and the Defendants represent and agree that the terms of the Settlement were negotiated at arm’s-length and in good faith by Plaintiff and the Defendants, and reflect a settlement that was reached voluntarily based upon adequate information and sufficient discovery and after consultation with experienced legal counsel.
31. The consummation of the Settlement as embodied in this Stipulation shall be under the authority of the Court.
32. Without further order of the Court, Plaintiff and the Defendants may agree to reasonable extensions of time to carry out any of the provisions of this Stipulation.
33. To the extent permitted by law, all agreements made and orders entered during the course of the Action relating to the confidentiality of documents or information shall survive this Stipulation.
34. The waiver by Plaintiff or the Defendants of any breach of this Stipulation shall not be deemed a waiver of any other prior or subsequent breach of any provision of this Stipulation.
35. This Stipulation and the Exhibits constitute the entire agreement between Plaintiff, on the one hand, and any Defendants, on the other hand, and supersede any prior agreements among the Plaintiff, on the one hand, and any Defendants, on the other hand, with respect to the Settlement. No representations, warranties or inducements have been made to or relied upon by any Party concerning this Stipulation or its Exhibits, other than the representations, warranties and covenants expressly set forth in such documents.
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36. This Stipulation may be executed in one or more counterparts, including by facsimile and electronic mail.
37. The Parties agree that they will use their reasonable best efforts to obtain all necessary approvals of the Court required by this Stipulation (including, but not limited to, using their reasonable best efforts to resolve any objections raised to the Settlement), and to promptly agree upon and execute all such other documentation as may be reasonably required to obtain final approval by the Court of the Settlement.
38. Plaintiff and Plaintiff’s Counsel represent and warrant that Plaintiff is a member of the Class and that none of Plaintiff’s claims or causes of action referred to in this Stipulation have been assigned, encumbered, or otherwise transferred in any manner in whole or in part.
39. Each counsel signing this Stipulation represents and warrants that such counsel has been duly empowered and authorized to sign this Stipulation on behalf of his or her clients.
40. This Stipulation shall not be construed more strictly against one Party than another merely by virtue of the fact that it, or any part of it, may have been prepared by counsel for one of the Parties, it being recognized that it is the result of arm’s-length negotiations between the Parties, and all Parties have contributed substantially and materially to the preparation of this Stipulation.
41. This Stipulation is and shall be binding upon and shall inure to the benefit of the Released Defendant Persons and the Released Plaintiff Persons (including the Class Members) and the respective legal representatives, heirs, executors, administrators, transferees, successors and assigns of all such foregoing persons and entities and upon any corporation, partnership, or other entity into or with which any party may merge, consolidate or reorganize.
42. This Stipulation, the Settlement, and any and all disputes arising out of or relating in any way to this Stipulation or Settlement, whether in contract, tort or otherwise, shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to conflicts of law principles. Any action or proceeding to enforce any of the terms of this Stipulation or Settlement, or any other action or proceeding among the Parties arising out of or relating in any way to this Stipulation or the Settlement, shall (i) be brought, heard and determined exclusively in the Court (provided that, in the event that subject matter jurisdiction is unavailable in the Court, then any such action or proceeding shall be brought, heard and determined exclusively in any other state court sitting in Wilmington, Delaware) and (ii) shall not be litigated or otherwise pursued in any forum or venue other than the Court (or, if subject matter jurisdiction is unavailable in the Court, then in any forum or venue other than any other state or federal court sitting in Wilmington, Delaware). Each Party hereto (1) consents to personal jurisdiction in any such action (but in no other action) brought in this Court; (2) consents to service of process by email on counsel for such Party and/or such Parties; (3) waives any objection to venue in this Court and any claim that Delaware or this Court is an inconvenient forum; and (4) expressly waives any right to demand a jury trial as to any dispute described in this paragraph.
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Date: October 26, 2022
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LONG LAW, LLC
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| of counsel: | /s/ Brian D. Long |
Carl L. Stine Adam J. Blander Radha Raghavan WOLF POPPER LLP 845 Third Avenue New York, NY 10022 (212) 759-4600
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Brian D. Long (#4347) 3828 Kennett Pike, Suite 208 Wilmington, DE 19807 (302) 729-9100
Attorneys for Plaintiff |
Date: October 26, 2022
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Morris, Nichols, Arsht & Tunnell LLP
|
| OF COUNSEL: | /s/ D. McKinley Measley |
Koji Fukumura Peter Adams COOLEY LLP 10265 Science Center Drive San Diego, CA 92121 (858) 550-6000 |
D. McKinley Measley (#5108) Sarah P. Kaboly (#6673) 1201 N. Market Street Wilmington, DE 19801 (302) 658-9200
Attorneys
for Defendant
|
Date: October 26, 2022
|
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
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| OF COUNSEL: | /s/ Edward B. Michelietti |
Peter B. Morrison Virginia F. Milstead SKADDEN,
ARPS, SLATE, 300 South Grand Avenue, Suite 3400 Los Angeles, CA 90071 (213) 687-5000 |
Edward B. Micheletti (#3794) Bonnie W. David (#5964) One Rodney Square P.O. Box 636 Wilmington, DE 19899 (302) 651-3000
Attorneys for Defendants Michael H. Mulroy, Alfred D. Kingsley, Richard T. LeBuhn and Aditya Mohanty |
| 14 |
Exhibit 21.1
Lineage Cell Therapeutics, Inc.
The following is a list of subsidiaries of Lineage Cell Therapeutics, Inc. as of December 31, 2022, omitting some subsidiaries which, considered in the aggregate, would not constitute a significant subsidiary.
| Subsidiary | State or Jurisdiction of Incorporation or Organization | |
| Cell Cure Neurosciences Ltd | Israel | |
| ES Cell International Pte. Ltd | Singapore |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Registration Nos. 333-166862, 333-167822, 333-174282, 333-182964, 333-183557, 333-187710, 333-188066, 333-201824, 333-209000, 333-217182, 333-218807, 333-237975, 333-254155, and 333-254167), and Form S-8 (Registration Nos. 333-101651, 333-122844, 333-163396, 333-192531, 333-205661, 333-219204, 333-233132, 333-254158, and 333-259853) of Lineage Cell Therapeutics, Inc. of our report dated March 9, 2023, relating to the consolidated financial statements, which appears in this Form 10-K.
| /s/ WithumSmith+Brown, PC | |
| San Francisco, California | |
| March 9, 2023 |
Exhibit 31.1
CERTIFICATIONS
I, Brian M. Culley, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Lineage Cell Therapeutics, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: March 9, 2023
| /s/ Brian M. Culley | |
| Brian M. Culley | |
| Chief Executive Officer | |
| (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATIONS
I, Jill Ann Howe, certify that:
| 1. | I have reviewed this annual report on Form 10-K of Lineage Cell Therapeutics, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: March 9, 2023
| /s/ Jill Ann Howe | |
| Jill Ann Howe | |
| Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-K of Lineage Cell Therapeutics, Inc. (the “Company”) for the year ended December 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Brian M. Culley, Chief Executive Officer of the Company, and Jill Ann Howe, Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| 1. | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: March 9, 2023
| /s/ Brian M. Culley | |
| Brian M. Culley | |
| Chief Executive Officer | |
| (Principal Executive Officer) |
| /s/ Jill Ann Howe | |
| Jill Ann Howe | |
| Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
A signed original of this written statement required by Section 906 has been provided to Lineage Cell Therapeutics, Inc. and will be retained by Lineage Cell Therapeutics, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.