NOTES
TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
1.
Organization and Business Overview
Lineage
is a clinical-stage biotechnology company developing novel cell therapies for unmet medical needs. Our current focus is on therapies
for degenerative retinal diseases, neurological conditions associated with demyelination, and aiding the body in detecting and
combating cancer. Lineage’s programs are based on its proprietary cell-based therapy platform and associated development
and manufacturing capabilities. With this platform, Lineage develops and manufactures specialized, terminally-differentiated human
cells from its pluripotent and progenitor cell starting materials. These differentiated cells are developed either to replace
or support cells that are dysfunctional or absent due to degenerative disease or traumatic injury, or administered as a means
of helping the body mount an effective immune response to cancer.
Lineage
has three cell therapy programs in clinical development:
|
●
|
OpRegen®,
a retinal pigment epithelium cell replacement therapy currently in a Phase I/IIa multicenter clinical trial for the treatment
of advanced dry-age-related macular degeneration (“dry-AMD”) with geographic atrophy. There currently are no therapies
approved by the U.S. Food and Drug Administration (“FDA”) for dry-AMD, which accounts for approximately 85-90%
of all AMD cases and is a leading cause of blindness in people over the age of 65.
|
|
|
|
|
●
|
OPC1,
an oligodendrocyte progenitor cell therapy currently in a Phase I/IIa multicenter clinical trial for acute spinal cord injuries.
This clinical trial has been partially funded by the California Institute for Regenerative Medicine.
|
|
|
|
|
●
|
VAC2,
an allogeneic (non-patient-specific or “off-the-shelf”) cancer immunotherapy of antigen-presenting dendritic cells
currently in a Phase I clinical trial in non-small cell lung cancer. This clinical trial is being funded and conducted by
Cancer Research UK, the world’s largest independent cancer research charity.
|
Lineage
also has cell/drug delivery programs that are based upon its proprietary HyStem® cell and drug delivery
matrix technology. HyStem was designed to support the formulation, transfer, retention, and engraftment of cellular therapies.
Renevia® is a proprietary 3-D scaffold designed to support adipose tissue transplants. In a European pivotal clinical trial in patients with HIV-associated facial
lipoatrophy, the primary endpoint of change in hemifacial volume at 6 months in treated patients compared to patients in the delayed
treatment arm as measured by three-dimensional photographic volumetric assessment was met. In 2018, we submitted a design dossier
for EU market clearance (CE Mark) for the use of Renevia as a device to aid in transferring a patient’s own adipose tissue
to treat certain forms of facial lipoatrophy, or fat loss.
Lineage was granted a CE Mark for Renevia in September 2019 and is currently working to identify a commercialization partner
in Europe.
Lineage
is also enabling early-stage programs in other new technologies through its own research programs.
Asterias
Merger
On
November 7, 2018, Lineage, Asterias and Patrick Merger Sub, Inc., a wholly owned subsidiary of Lineage, entered into an Agreement
and Plan of Merger (the “Merger Agreement”) whereby Lineage agreed to acquire all of the outstanding common stock
of Asterias in a stock-for-stock transaction (the “Asterias Merger”).
On
March 7, 2019, the shareholders of each of Lineage and Asterias approved the Merger Agreement. Prior to the Asterias Merger, Lineage
owned approximately 38% of Asterias’ issued and outstanding common stock and accounted for Asterias as an equity method
investment.
On
March 8, 2019, the Asterias Merger closed with Asterias surviving as a wholly owned subsidiary of Lineage. The former stockholders
of Asterias (other than Lineage) received 0.71 common shares of Lineage for every share of Asterias common stock they owned. Lineage
issued 24,695,898 common shares, including 58,085 shares issued in respect of restricted stock units issued by Asterias that immediately
vested in connection with the closing of the Asterias Merger. The aggregate dollar value of such shares, based on the closing
price of Lineage common shares on March 8, 2019, was $32.4 million. Lineage also assumed warrants to purchase shares of Asterias
common stock.
The
Asterias Merger has been accounted for using the acquisition method of accounting in accordance with Accounting Standards Codification
(“ASC”) Topic 805, Business Combinations, which requires, among other things, that the assets and liabilities
assumed be recognized at their fair values as of the acquisition date.
See
Note 3 for a full discussion of the Asterias Merger.
Investment
in OncoCyte
Lineage
has significant equity holdings in OncoCyte Corporation (“OncoCyte”), a publicly traded company, which Lineage founded
and, in the past, was a majority-owned consolidated subsidiary until February 17, 2017. The deconsolidation of OncoCyte is sometimes
referred to as the “OncoCyte Deconsolidation” in this Report. OncoCyte (NYSE American: OCX) is developing confirmatory
diagnostic tests for lung cancer utilizing novel liquid biopsy technology. As of September 30, 2019, Lineage owned 8.4 million
shares of OncoCyte common stock, or 16% of its outstanding shares (see Note 4).
2.
Basis of Presentation, Liquidity and Summary of Significant Accounting Policies
The
unaudited condensed consolidated interim financial statements presented herein, and discussed below, have been prepared in accordance
with GAAP for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. In accordance
with those rules and regulations certain information and footnote disclosures normally included in comprehensive consolidated
financial statements have been condensed or omitted. The condensed consolidated balance sheet as of December 31, 2018 was derived
from the audited consolidated financial statements at that date, but does not include all the information and footnotes required
by GAAP. These condensed consolidated interim financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto included in Lineage’s Annual Report on Form 10-K for the year ended December 31,
2018.
The
accompanying condensed consolidated interim financial statements, in the opinion of management, include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of Lineage’s financial condition and results of
operations. The condensed consolidated results of operations are not necessarily indicative of the results to be expected for
any other interim period or for the entire year.
Principles
of consolidation
Lineage’s
condensed consolidated interim financial statements include the accounts of its subsidiaries. The following table reflects Lineage’s
ownership, directly or through one or more subsidiaries, of the outstanding shares of its operating subsidiaries as of September
30, 2019.
Subsidiary
|
|
Field
of Business
|
|
Lineage
Ownership
|
|
Country
|
Asterias
BioTherapeutics, Inc.
|
|
Cell
therapy clinical development programs in spinal cord injury and oncology
|
|
100%
|
|
USA
|
Cell
Cure Neurosciences Ltd. (“Cell Cure”)
|
|
Products
to treat age-related macular degeneration
|
|
99%
(1)
|
|
Israel
|
ES
Cell International Pte. Ltd. (“ESI”)
|
|
Stem
cell products for research, including clinical grade cell lines produced under cGMP
|
|
100%
|
|
Singapore
|
OrthoCyte
Corporation (“OrthoCyte”)
|
|
Developing
bone grafting products for orthopedic diseases and injuries
|
|
99.8%
|
|
USA
|
(1)
|
Includes
shares owned by Lineage and ESI.
|
For
the three and nine months ended September 30, 2018, Lineage’s unaudited consolidated results include AgeX’s consolidated
results for the period through August 30, 2018. As a result of the AgeX Deconsolidation, beginning on August 30, 2018 (a) AgeX’s
consolidated financial statements and consolidated results are no longer a part of Lineage’s condensed consolidated interim
financial statements and results, and (b) the fair value of AgeX common stock held by Lineage is now reflected on Lineage’s
condensed consolidated balance sheet and the changes in the fair value of those shares during the applicable reporting period
are reflected as gains or losses in Lineage’s condensed consolidated statements of operations included in other income and
expenses, net.
All
material intercompany accounts and transactions have been eliminated in consolidation. As of September 30, 2019, Lineage consolidated
its direct and indirect wholly owned or majority-owned subsidiaries because Lineage has the ability to control their operating
and financial decisions and policies through its ownership, and the noncontrolling interest is reflected as a separate element
of shareholders’ equity on Lineage’s consolidated balance sheets.
Liquidity
Since
inception, Lineage has incurred significant operating losses and has funded its operations primarily through the issuance of equity
securities, sale of common stock of AgeX, a former subsidiary, receipt of research grants, royalties from product sales, license
revenues and sales of research products. Additionally, Lineage raised $10.7 million in sales of a portion of its OncoCyte holdings,
$1.6 million in sales of a portion of its AgeX holdings and $1.2 million in sales of a portion of its Hadasit Bio-Holdings Ltd.
(“HBL”) holdings in the third quarter of 2019. At September 30, 2019, Lineage had an accumulated deficit of approximately
$268.9 million, working capital of $55.4 million and shareholders’ equity of $115.5 million. Lineage has evaluated its projected
cash flows and believes that its $35.7 million of cash, cash equivalents and marketable equity securities, including its positions
in OncoCyte, AgeX and HBL, at September 30, 2019, provide sufficient cash, cash equivalents, and liquidity to carry out Lineage’s
current planned operations through at least twelve months from the issuance date of the consolidated financial statements included
herein. If Lineage needs near term working capital or liquidity to supplement its cash and cash equivalents for its operations,
Lineage may sell some, or all, of its marketable equity securities, as necessary.
If
the promissory note issued by Juvenescence in favor of Lineage discussed in Note 5 is converted into equity securities of Juvenescence
prior to its maturity date, the Juvenescence equity securities may be marketable securities that Lineage may use to supplement
its liquidity, as needed. If such promissory note is not converted, it is payable in cash, plus accrued interest, at maturity
on August 30, 2020.
On
March 8, 2019, with the consummation of the Asterias Merger, Asterias became Lineage’s wholly owned subsidiary. Lineage
began consolidating Asterias’ operations and results with its operations and results beginning on March 8, 2019 (see Note
3). As Lineage integrates Asterias’ operations into its own, Lineage has made extensive reductions in headcount and reduced
non-clinical related spend, in each case, as compared to Asterias’ operations before the Asterias Merger.
Lineage’s
projected cash flows are subject to various risks and uncertainties, and the unavailability or inadequacy of financing to meet
future capital needs could force Lineage to modify, curtail, delay, or suspend some or all aspects of its planned operations.
Lineage’s determination as to when it will seek new financing and the amount of financing that it will need will be based
on Lineage’s evaluation of the progress it makes in its research and development programs, any changes to the scope and
focus of those programs, any changes in grant funding for certain of those programs, and projection of future costs, revenues,
and rates of expenditure. Lineage may be required to delay, postpone, or cancel clinical trials or limit the number of clinical
trial sites, unless it is able to obtain adequate financing. In addition, Lineage has incurred and expects to continue incurring
significant costs in connection with the acquisition of Asterias and with integrating its operations. Lineage may incur additional
costs to maintain employee morale and to retain key employees. Lineage cannot assure that adequate financing will be available
on favorable terms, if at all. Sales of additional equity securities by Lineage or its subsidiaries and affiliates could result
in the dilution of the interests of current shareholders.
Business
Combinations
Lineage
accounts for business combinations, such as the Asterias Merger completed in March 2019, in accordance with ASC Topic 805, which
requires the purchase price to be measured at fair value. When the purchase consideration consists entirely of shares of Lineage’s
common stock, Lineage calculates the purchase price by determining the fair value, as of the acquisition date, of shares issued
in connection with the closing of the acquisition. Lineage recognizes estimated fair values of the tangible assets and intangible
assets acquired, including in-process research and development (“IPR&D”), and liabilities assumed as of the acquisition
date, and records as goodwill any amount of the fair value of the tangible and intangible assets acquired and liabilities assumed
in excess of the purchase price.
Marketable
Equity Securities
Lineage
accounts for the shares it holds in OncoCyte, AgeX and HBL as marketable equity securities in accordance with ASC 320-10-25, Investments
– Debt and Equity Securities, as amended by Accounting Standards Update (“ASU”) 2016-01, Financial Instruments–Overall:
Recognition and Measurement of Financial Assets and Financial Liabilities, further discussed below.
The
OncoCyte and AgeX shares have readily determinable fair values quoted on the NYSE American under trading symbols “OCX”
and “AGE”. The HBL shares have a readily determinable fair value quoted on the Tel Aviv Stock Exchange (“TASE”)
under trading symbol “HDST” where share prices are denominated in New Israeli Shekels (NIS). Accordingly, the marketable
equity securities are considered level 1 assets as defined by ASC 820. These securities are held principally to meet future working
capital needs. These securities are measured at fair value and reported as current assets on the consolidated balance sheets based
on the closing trading price of the security as of the date being presented.
Prior
to September 11, 2019, Lineage accounted for its OncoCyte shares held at fair value, using the equity method of accounting. On
September 11, 2019, Lineage’s ownership percentage decreased from 24% to 16% when it sold 4.0 million shares of OncoCyte
common stock. Accordingly, as the ownership percentage is less than 20%, Lineage is no longer considered to exercise significant
influence over OncoCyte and is now accounting for its OncoCyte holdings as marketable equity securities.
Prior
to the Asterias Merger completed on March 8, 2019 discussed in Note 3, Lineage accounted for its Asterias shares held at fair
value, using the equity method of accounting.
Revenue
Recognition
During
the first quarter of 2018, Lineage adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update
(“ASU”) ASU 2014-09, Revenues from Contracts with Customers (Topic 606), which created a single, principle-based
revenue recognition model that supersedes and replaces nearly all existing U.S. GAAP revenue recognition guidance. Lineage adopted
ASU 2014-09 using the modified retrospective transition method applied to those contracts which were not completed as of the adoption
date. Results for reporting periods beginning on January 1, 2018 and thereafter are presented under Topic 606, while prior period
amounts are not adjusted and continue to be reported in accordance with Lineage’s historical revenue recognition accounting
under Topic 605.
Lineage
recognizes revenue in a manner that depicts the transfer of control of a product or a service to a customer and reflects the amount
of the consideration it is entitled to receive in exchange for such product or service. In doing so, Lineage follows a five-step
approach: (i) identify the contract with a customer, (ii) identify the performance obligations in the contract, (iii) determine
the transaction price, (iv) allocate the transaction price to the performance obligations, and (v) recognize revenue when (or
as) the customer obtains control of the product or service. Lineage considers the terms of a contract and all relevant facts and
circumstances when applying the revenue recognition standard. Lineage applies the revenue recognition standard, including the
use of any practical expedients, consistently to contracts with similar characteristics and in similar circumstances.
Lineage’s
largest source of revenue is currently related to government grants. In applying the provisions of ASU 2014-09, Lineage has determined
that government grants are out of the scope of ASU 2014-09 because the government entities do not meet the definition of a “customer”,
as defined by ASU 2014-09, as there is not considered to be a transfer of control of good or services to the government entities
funding the grant. Lineage has, and will continue to, account for grants received to perform research and development services
in accordance with ASC 730-20, Research and Development Arrangements, which requires an assessment, at the inception of
the grant, of whether the grant is a liability or a contract to perform research and development services for others. If Lineage
or a subsidiary receiving the grant is obligated to repay the grant funds to the grantor regardless of the outcome of the research
and development activities, then Lineage is required to estimate and recognize that liability. Alternatively, if Lineage or a
subsidiary receiving the grant is not required to repay, or if it is required to repay the grant funds only if the research and
development activities are successful, then the grant agreement is accounted for as a contract to perform research and development
services for others, in which case, grant revenue is recognized when the related research and development expenses are incurred
(see Note 15).
Deferred
grant revenues represent grant funds received from the governmental funding agencies for which the allowable expenses have not
yet been incurred as of the balance sheet date reported. As of September 30, 2019, deferred grant revenue was $182,000.
Basic
and diluted net income (loss) per share attributable to common shareholders
Basic
earnings per share is calculated by dividing net income or loss attributable to Lineage common shareholders by the weighted average
number of common shares outstanding, net of unvested restricted stock or restricted stock units, subject to repurchase by Lineage,
if any, during the period. Diluted earnings per share is calculated by dividing the net income or loss attributable to Lineage
common shareholders by the weighted average number of common shares outstanding, adjusted for the effects of potentially dilutive
common shares issuable under outstanding stock options and warrants, using the treasury-stock method, convertible preferred stock,
if any, using the if-converted method, and treasury stock held by subsidiaries, if any.
For
the three and nine months ended September 30, 2019, and for the nine months ended September 30, 2018, Lineage reported a net loss
attributable to common shareholders, and therefore, all potentially dilutive common stock was considered antidilutive for those
periods. For the three months ended September 30, 2018, Lineage reported net income attributable to common shareholders, and therefore,
performed an analysis of common share equivalents to determine their impact on diluted net income, and determined that none of
the common share equivalents were dilutive.
The
following weighted average common share equivalents were excluded from the computation of diluted net income (loss) per common
share for the periods presented because including them would have been antidilutive (in thousands):
|
|
Three Months Ended
September 30,
(unaudited)
|
|
|
Nine Months Ended
September 30,
(unaudited)
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Stock options
|
|
|
15,941
|
|
|
|
9,742
|
|
|
|
15,332
|
|
|
|
9,301
|
|
Warrants (1)
|
|
|
-
|
|
|
|
8,795
|
|
|
|
-
|
|
|
|
9,138
|
|
Lineage Warrants (2) (Note 3)
|
|
|
1,090
|
|
|
|
-
|
|
|
|
975
|
|
|
|
-
|
|
Restricted stock units
|
|
|
236
|
|
|
|
83
|
|
|
|
277
|
|
|
|
286
|
|
(1)
|
The
warrants expired on October 1, 2018.
|
(2)
|
Although
the Lineage Warrants are classified as liabilities, these warrants are considered for dilutive earnings per share calculations
in accordance with ASC 260, Earnings Per Share, and determined to be anti-dilutive for the period presented.
|
Lease
accounting and impact of adoption of the new lease standard
On
January 1, 2019, Lineage adopted ASU 2016-02, Leases (Topic 842, “ASC 842”) and its subsequent amendments affecting
Lineage: (i) ASU 2018-10, Codification Improvements to Topic 842, Leases, and (ii) ASU 2018-11, Leases (Topic 842):
Targeted improvements, using the modified retrospective method (see Note 15).
Lineage
management determines if an arrangement is a lease at inception. Leases are classified as either financing or operating, with
classification affecting the pattern of expense recognition in the consolidated statements of operations. When determining whether
a lease is a finance lease or an operating lease, ASC 842 does not specifically define criteria to determine “major part
of remaining economic life of the underlying asset” and “substantially all of the fair value of the underlying asset.”
For lease classification determination, Lineage continues to use (i) greater to or equal to 75% to determine whether the lease
term is a major part of the remaining economic life of the underlying asset and (ii) greater to or equal to 90% to determine whether
the present value of the sum of lease payments is substantially all of the fair value of the underlying asset. Under the available
practical expedients, Lineage accounts for the lease and non-lease components as a single lease component. Lineage recognizes
right-of-use (“ROU”) assets and lease liabilities for leases with terms greater than twelve months in the condensed
consolidated balance sheet.
ROU
assets represent Lineage’s right to use an underlying asset during the lease term and lease liabilities represent Lineage’s
obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement
date based on the present value of lease payments over the lease term. As most of Lineage’s leases do not provide an implicit
rate, Lineage uses its incremental borrowing rate based on the information available at commencement date in determining the present
value of lease payments. Lineage uses the implicit rate when readily determinable. The operating lease ROU asset also includes
any lease payments made and excludes lease incentives. Lineage’s lease terms may include options to extend or terminate
the lease when it is reasonably certain that Lineage will exercise that option. Lease expense for lease payments is recognized
on a straight-line basis over the lease term.
Operating
leases are included as right-of-use assets in property and equipment (see Note 7), and ROU lease liabilities, current and long-term,
in the condensed consolidated balance sheets. Financing leases are included in property and equipment, and in financing lease
liabilities, current and long-term, in Lineage’s condensed consolidated balance sheets.
In
connection with the adoption on ASC 842 on January 1, 2019, Lineage derecognized net book value of leasehold improvements and
corresponding lease liabilities of $1.9 million and $2.0 million, respectively, which was the carrying value of certain operating
leases as of December 31, 2018, included in property and equipment and lease liabilities, respectively, recorded pursuant to build
to suit lease accounting under the previous ASC 840 lease standard. The derecognition of these amounts from the superseded ASC
840 lease standard was offset by a cumulative effect adjustment of $0.1 million as a reduction of Lineage’s accumulated
deficit on January 1, 2019. These build to suit leases were primarily related to the Alameda and the Cell Cure Leases described
in Note 15. ASC 842 requires build to suit leases recognized on Lineage’s consolidated balance sheets as of December 31,
2018 to be derecognized upon the adoption of the new lease standard and be recognized in accordance with the new standard on January
1, 2019.
The
adoption of ASC 842 had a material impact in Lineage’s consolidated balance sheets, with the most significant impact resulting
from the recognition of ROU assets and lease liabilities for operating leases with remaining terms greater than twelve months
on the adoption date (see Note 15). Lineage’s accounting for financing leases (previously referred to as “capital
leases”) remained substantially unchanged.
Other
recently adopted accounting pronouncements
Adoption
of ASU 2016-18, Statement of Cash Flows (Topic 230) - On January 1, 2018, Lineage adopted ASU 2016-18, Statement
of Cash Flows (Topic 230): Restricted Cash, which requires that the statement of cash flows explain the change during the
period in the total of cash, cash equivalents and restricted cash, and that restricted cash be included with cash and cash equivalents
when reconciling the beginning-of-period and end-of-period total amounts shown on the condensed consolidated statements of cash
flows. The adoption of ASU 2016-18 did not have a material effect on Lineage’s condensed consolidated financial statements.
However, prior period restricted cash balances included in prepaid expenses and other current assets, and in deposits and other
long-term assets, on the condensed consolidated balance sheets was added to the beginning-of-period and end-of-period total consolidated
cash and cash equivalents in the condensed consolidated statements of cash flows to conform to the current presentation shown
below.
The
following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated
balance sheet dates that comprise the total of the same such amounts shown in the condensed consolidated statements of cash flows
for all periods presented herein and effected by the adoption of ASU 2016-18 (in thousands):
|
|
September
30,
2019
|
|
|
December
31,
2018
|
|
|
September
30,
2018
|
|
|
December
31,
2017
|
|
|
|
(unaudited)
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
14,366
|
|
|
$
|
23,587
|
|
|
$
|
19,467
|
|
|
$
|
36,838
|
|
Restricted cash included in prepaid expenses and other current assets (see Note 15)
|
|
|
-
|
|
|
|
346
|
|
|
|
424
|
|
|
|
-
|
|
Restricted cash included in deposits and other long-term assets (see Note 15)
|
|
|
596
|
|
|
|
466
|
|
|
|
396
|
|
|
|
847
|
|
Total cash, cash equivalents, and restricted cash as shown in the condensed consolidated statements of cash flows
|
|
$
|
14,962
|
|
|
$
|
24,399
|
|
|
$
|
20,287
|
|
|
$
|
37,685
|
|
Adoption
of ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting -
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting, which simplifies the accounting for non-employee share-based payment transactions. The new standard expands
the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. ASU 2018-07
is effective for fiscal years beginning after December 15, 2018 (including interim periods within that fiscal year). Lineage adopted
ASU 2018-07 on January 1, 2019. As Lineage does not have a significant number of nonemployee share-based awards, the application
of the new standard did not have a material impact on its consolidated financial statements.
Recently
Issued Accounting Pronouncements Not Yet Adopted - The recently issued accounting pronouncements applicable to Lineage that
are not yet effective should be read in conjunction with the recently issued accounting pronouncements, as applicable and disclosed
in Lineage’s Annual Report on Form 10-K for the year ended December 31, 2018.
In
August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure
Requirements for Fair Value Measurement, which modifies certain disclosure requirements for reporting fair value measurements.
ASU 2018-13 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early
adoption is permitted. Lineage will adopt this standard on January 1, 2020 and does not believe adoption of the guidance will
have a significant impact on its consolidated financial statements.
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments. ASU 2016-13 is intended to provide financial statement users with more decision-useful information
about the expected credit losses on financial instruments and other commitments and requires consideration of a broader range
of reasonable and supportable information to inform credit loss estimates. This standard is currently effective for interim
and annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years, with early
adoption permitted for annual periods beginning after December 15, 2018. In October 2019, the FASB affirmed a proposed ASU
deferring the effective date of ASU 2016-13 for all entities except public companies that are not smaller reporting companies
to fiscal years beginning after December 15, 2022, including interim periods within those years. This proposed ASU has not been
finalized as of the date of this report. When finalized, Lineage plans to adopt ASU 2016-13 effective January 1, 2023. Lineage
has not yet completed its assessment of the impact of the new standard on its consolidated financial statements.
3.
Asterias Merger
On
March 8, 2019, the Asterias Merger closed with Asterias surviving as a wholly owned subsidiary of Lineage. The former stockholders
of Asterias (other than Lineage) received 0.71 common shares of Lineage (the “Merger Consideration”) for every share
of Asterias common stock they owned (the “Merger Exchange Ratio”). Lineage issued 24,695,898 common shares, including
58,085 shares issued in respect of restricted stock units issued by Asterias that immediately vested in connection with the closing
of the Asterias Merger. The fair value of such shares, based on the closing price of Lineage common shares on March 8, 2019, was
$32.4 million.
In
connection with the closing of the Asterias Merger, Lineage assumed outstanding warrants to purchase shares of Asterias common
stock, as further discussed below and in Note 11, and assumed sponsorship of the Asterias 2013 Equity Incentive Plan (see Note
12). All stock options to purchase shares of Asterias common stock outstanding immediately prior to the closing of the Asterias
Merger were canceled at the closing for no consideration.
As
of September 30, 2019, the assets and liabilities of Asterias have been included in the condensed consolidated balance sheet of
Lineage. The results of operations of Asterias from March 8, 2019 through September 30, 2019 have been included in the condensed
consolidated statement of operations of Lineage for the nine months ended September 30, 2019.
Calculation
of the purchase price
The
calculation of the purchase price for the Asterias Merger and the Merger Consideration transferred on March 8, 2019 was as follows
(in thousands, except for share and per share amounts):
|
|
Lineage
(38% ownership
interest)
|
|
|
Shareholders
other than
Lineage
(approximate
62% ownership
interest)
|
|
|
Total
|
|
Outstanding Asterias common stock as of March 8, 2019
|
|
|
21,747,569
|
|
|
|
34,783,333
|
(1)
|
|
|
56,530,902
|
(1)
|
Exchange ratio
|
|
|
0.710
|
|
|
|
0.710
|
|
|
|
0.710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lineage common shares issuable
|
|
|
15,440,774
|
(2)
|
|
|
24,695,898
|
(3)
|
|
|
40,136,672
|
|
Per share price of Lineage common shares as of March 8, 2019
|
|
$
|
1.31
|
|
|
$
|
1.31
|
|
|
$
|
1.31
|
|
Purchase price (in $000s)
|
|
$
|
20,227
|
(2)
|
|
$
|
32,353
|
|
|
$
|
52,580
|
|
(1)
|
Includes
81,810 shares of Asterias restricted stock unit awards that immediately vested on March 8, 2019 and converted into the right
to receive common shares of Lineage based on the Merger Exchange Ratio, resulting in 58,085 common shares of Lineage issued
on March 8, 2019 as part of the Merger Consideration. These restricted stock units were principally attributable to pre-combination
services and included as part of the purchase price in accordance with ASC 805. See Note 12 for Asterias restricted stock
units that vested on the closing of the Asterias Merger attributable to post-combination services that were recorded outside
of the purchase price as an immediate charge to stock-based compensation expense.
|
(2)
|
Estimated
fair value for Lineage’s previously held 38% ownership interest in Asterias common stock is part of the total purchase
price of Asterias for purposes of the purchase price allocation under ASC 805 and for Lineage’s adjustment of its 38%
interest to fair value at the effective date of the Asterias Merger and immediately preceding the consolidation of Asterias’
results with Lineage. No actual common shares of Lineage were issued to Lineage in connection with the Asterias Merger.
|
(3)
|
Net
of a de minimis number of fractional shares which were paid in cash.
|
Estimated
purchase price allocation
Lineage
allocated the acquisition consideration to tangible and identifiable intangible assets acquired and liabilities assumed based
on their estimated fair values as of the acquisition date. The fair value of the acquired tangible and identifiable intangible
assets were determined based on inputs that are unobservable and significant to the overall fair value measurement. It is also
based on estimates and assumptions made by management at the time of the acquisition. As such, this was classified as Level 3
fair value hierarchy measurements and disclosures.
The
Merger Consideration allocation below is preliminary and as additional information becomes available, Lineage may further revise
the preliminary acquisition consideration allocation. Lineage expects to finalize the acquisition consideration allocation by
the end of 2019. Any such revisions or changes may be material.
The
following table sets forth a preliminary allocation of the purchase price to Asterias’ tangible and identifiable intangible
assets acquired and liabilities assumed on the closing of the Asterias Merger, with the excess recorded as goodwill (in thousands):
Assets acquired:
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,117
|
|
Prepaid expenses and other assets, current and noncurrent
|
|
|
660
|
|
Machinery and equipment
|
|
|
369
|
|
Long-lived intangible assets - royalty contracts
|
|
|
650
|
|
Acquired in-process research and development (“IPR&D”)
|
|
|
46,540
|
|
|
|
|
|
|
Total assets acquired
|
|
|
51,336
|
|
Liabilities assumed:
|
|
|
|
|
Accrued liabilities and accounts payable
|
|
|
1,136
|
|
Liability classified warrants
|
|
|
867
|
|
Deferred license revenue
|
|
|
200
|
|
Long-term deferred income tax liability
|
|
|
12,965
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
15,168
|
|
|
|
|
|
|
Net assets acquired, excluding goodwill (a)
|
|
|
36,168
|
|
|
|
|
|
|
Fair value of Lineage common shares held by Asterias (b)
|
|
|
3,435
|
|
|
|
|
|
|
Total purchase price (c)
|
|
|
52,580
|
|
|
|
|
|
|
Estimated goodwill (c-a-b)
|
|
$
|
12,977
|
|
The
valuation of identifiable intangible assets and their estimated useful lives are as follows (in thousands, except for useful life):
|
|
Preliminary Estimated Asset Fair Value
|
|
|
Useful Life
(Years)
|
|
|
|
(in thousands, except for useful life)
|
|
In process research and development (“IPR&D”)
|
|
$
|
46,540
|
|
|
|
n/a
|
|
Royalty contracts
|
|
|
650
|
|
|
|
5
|
|
|
|
$
|
47,190
|
|
|
|
|
|
The
following is a discussion of the valuation methods used to determine the fair value of Asterias’ significant assets and
liabilities in connection with the Asterias Merger:
Acquired
In-Process Research and Development (“ IPR&D”) and Deferred Income Tax Liability - The fair value of identifiable
acquired in-process research and development intangible assets consisting of $31.7 million pertaining to the OPC1 program that
is currently in a Phase 1/2a clinical trial for spinal cord injuries (“SCI”), which has been partially funded by the
California Institute for Regenerative Medicine and $14.8 million pertaining to the VAC2 program, which is a non-patient-specific
(“off-the-shelf”) cancer immunotherapy derived from pluripotent stem cells for which a clinical trial in non-small
cell lung cancer is being funded and sponsored by Cancer Research UK. The identification of these intangible assets are based
on consideration of historical experience and a market participant’s view further discussed below; collectively, OPC1 and
the VAC2 are referred to as the “AST-Clinical Programs”. These intangible assets are valued primarily through the
use of a probability weighted discounted cash flow method under the income approach further discussed below. Lineage considered
the VAC1 program, an autologous product candidate, manufactured from cells that come from the patient, and due to significant
risks, substantial costs and limited opportunities in its current state associated with the VAC1 program, Lineage management considered
this program to have de minimis value.
Lineage
determined that the estimated aggregate fair value of the AST-Clinical programs was $46.5 million as of the acquisition date using
a probability weighted discounted cash flow method for each respective program. This approach estimates the probability of the
AST-Clinical Programs achieving successful completion of remaining clinical trials and related approvals into the valuation technique.
To
calculate fair value of the AST-Clinical programs under the discounted cash flow method, Lineage used probability-weighted, projected
cash flows discounted at a rate considered appropriate given the significant inherent risks associated with cell therapy development
by clinical-stage companies. Cash flows were calculated based on estimated projections of revenues and expenses related to each
respective program. Cash flows were assumed to extend through a seven-year market exclusivity period for the OPC1 program from
the date of market launch. Revenues from commercialization of the AST-Clinical Programs were based on estimated market potential
for the indication of each program. The resultant cash flows were then discounted to present value using a weighted-average cost
of capital for companies with profiles substantially similar to that of Lineage, which Lineage believes represents the rate that
market participants would use to value the assets. Lineage compensated for the phase of development of the program by applying
a probability factor to its estimation of the expected future cash flows. The projected cash flows were based on significant assumptions,
including the indications in which Lineage will pursue development of the AST-Clinical programs, the time and resources needed
to complete the development and regulatory approval, estimates of revenue and operating profit related to the program considering
its stage of development, the life of the potential commercialized product, market penetration and competition, and risks associated
with achieving commercialization, including delay or failure to obtain regulatory approvals to conduct clinical studies, failure
of clinical studies, delay or failure to obtain required market clearances, and intellectual property litigation.
These
IPR&D assets are indefinite-lived intangible assets until the completion or abandonment of the associated research and development
(“R&D”) efforts. Once the R&D efforts are completed or abandoned, the IPR&D will either be amortized over
the asset life as a finite-lived intangible asset or be impaired, respectively, in accordance with ASC 350, Intangibles - Goodwill
and Other. In accordance with ASC 350, goodwill and acquired IPR&D are determined to have indefinite lives and, therefore,
are not amortized. Instead, they are tested for impairment at least annually and between annual tests if Lineage becomes aware
of an event or a change in circumstances that would indicate the asset may be impaired.
Because
the IPR&D (prior to completion or abandonment of the R&D) is considered an indefinite-lived asset for accounting purposes,
the fair value of the IPR&D on the acquisition date creates a deferred income tax liability (“DTL”) in accordance
with ASC 740, Income Taxes (see Note 13). This DTL is computed using the fair value of the IPR&D assets on the acquisition
date multiplied by Lineage’s federal and state income tax rates. While this DTL would reverse on impairment or sale or commencement
of amortization of the related intangible assets, those events are not anticipated under ASC 740 for purposes of predicting reversal
of a temporary difference to support the realization of deferred tax assets, except for certain deferred tax assets and credit
carryforwards that are also indefinite in nature as of the closing of the Asterias Merger, which may be considered for reversal
under ASC 740 as further discussed in Note 13.
Royalty
contracts - Asterias has certain royalty revenues for “research only use” culture media for pre-clinical research
applications under certain, specific patent families under contracts which preclude the customers to sell for commercial use or
for clinical trials. These royalty cash flows are generated under certain specific patent families which Asterias previously acquired
from Geron Corporation (“Geron”). Asterias pays Geron a royalty for all royalty revenues received from these contracts.
Because these patents are a subset of the clinical programs discussed above, are expected to continue to generate revenues for
Asterias and are not to be used in the OPC1 or the VAC2 programs, these patents are considered to be separate long-lived intangible
assets under ASC 805. These intangible assets are also valued primarily through the use of the discounted cash flow method under
the income approach, and will be amortized over their useful life, estimated to be 5 years. The discounted cash flow method estimated
the amount of net royalty income that can be expected under the contracts in future years. The amounts were based on observed
historical trends in the growth of these revenue streams, and were estimated to terminate in approximately five years, when the
key patents under these contracts will begin to expire. The resulting cash flows were discounted to the valuation date based on
a rate of return that recognizes a lower level of risk associated with these assets as compared to the AST-Clinical programs discussed
above.
Deferred
license revenue - In September 2018, Asterias and Novo Nordisk A/S (“Novo Nordisk”) entered into an option for
Novo Nordisk or its designated U.S. affiliate to license, on a non-exclusive basis, certain intellectual property related to culturing
pluripotent stem cells, such as hES cells, in suspension. Under the terms of the option, Asterias received a one-time upfront
payment of $1.0 million, in exchange for a 24-month period option to negotiate a non-exclusive license during which time Asterias
has agreed to not grant any exclusive licenses inconsistent with the Novo Nordisk option. This option is considered a performance
obligation as it provides Novo Nordisk with a material right that it would not receive without entering into the contract.
For
business combination purposes under ASC 805, the fair value of this performance obligation to Lineage, from a market participant
perspective, is the estimated costs Lineage may incur, plus a normal profit margin for the level of effort required to perform
under the contract after the acquisition date, assuming Novo Nordisk exercised its option, including, but not limited to, negotiation
costs, legal fees, arbitration, if any, and other related costs. Management has estimated those costs, plus a normal profit margin,
to be approximately $200,000 in the estimated purchase price allocation.
Liability
classified warrants - On May 13, 2016, in connection with a common stock offering, Asterias issued warrants to purchase 2,959,559
shares of Asterias common stock (the “Asterias Warrants”) with an exercise price of $4.37 per share that expire in
five years from the issuance date, or May 13, 2021. As of the closing of the Asterias Merger, there were 2,813,159 Asterias Warrants
outstanding. The Asterias Warrants contain certain provisions in the event of a Fundamental Transaction, as defined in the warrant
agreement governing the Asterias Warrants (“Warrant Agreement”), that Asterias or any successor entity will be required
to purchase, at a holder’s option, exercisable at any time concurrently with or within thirty days after the consummation
of the fundamental transaction, the Asterias Warrants for cash in an amount equal to the calculated value of the unexercised portion
of such holder’s warrants, determined in accordance with the Black-Scholes option pricing model with significant inputs
as specified in the Warrant Agreement. The Asterias Merger was a Fundamental Transaction for purposes of the Asterias Warrants.
The
fair value of the Asterias Warrants was determined by using Black-Scholes option pricing models which take into consideration
the probability of the fundamental transaction, which for purposes of the above valuation was assumed to be at 100% and net cash
settlement occurring, using the contractual remaining term of the warrants. In applying these models, these inputs included key
assumptions including the per share closing price of Lineage common shares on March 8, 2019, volatility computed in accordance
with the provisions of the Warrant Agreement and, to a large extent, assumptions based on discussions with a majority of the holders
of the Asterias Warrants since the closing of the Asterias Merger to settle the Asterias Warrants in cash or in common shares
of Lineage. Based on such discussions, Lineage believes the fair value of the Asterias Warrants as of the closing of the Asterias
Merger is not subject to change significantly, however, to the extent any Asterias Warrants that were not settled in cash or in
Lineage common shares discussed below, were automatically converted to Lineage warrants 30 days after the closing of the Asterias
Merger. In April 2019, Asterias Warrants representing approximately $372,000 in fair value were settled: $332,000 in fair value
was settled in exchange for 251,835 common shares of Lineage, and $40,000 in fair value was settled in exchange for cash. The
Asterias Warrants settled in exchange for common shares of Lineage were held by Broadwood Partners, L.P., an Asterias and Lineage
shareholder. The Asterias Warrants settled in exchange for cash were held by other parties. The remaining Asterias Warrants (representing
approximately $495,000 in fair value as of March 31, 2019) were converted into warrants to purchase common shares of Lineage using
the Merger Exchange Ratio (the “Lineage Warrants”).
As
of September 30, 2019, the total number of common shares of Lineage subject to warrants that were assumed by Lineage in connection
with the Asterias Merger was 1,089,900, with similar terms and conditions retained under the Lineage Warrants as per the original
Warrant Agreements. The Lineage Warrants have an exercise price of $6.15 per warrant share and expire on May 13, 2021. Lineage
is accounting for the outstanding Lineage Warrants as a liability at fair value, with subsequent changes to the fair value of
the Lineage Warrants at each reporting period thereafter included in the consolidated statement of operations (see Note 11).
Fair
value of Lineage common shares held by Asterias - As of March 8, 2019, Asterias held 2,621,811 common shares of Lineage as
marketable securities on its standalone financial statements. The fair value of those shares acquired by Lineage from Asterias
is determined based on the $1.31 per share closing price of Lineage common shares on March 8, 2019. Although treasury shares are
not considered an asset and were retired upon Lineage’s acquisition of Asterias, the fair value of those shares is a part
of the purchase price allocation shown in the tables above. These Lineage shares were retired at the completion of the Asterias
Merger.
Goodwill
- Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the
values assigned to the assets acquired and liabilities assumed. Goodwill is not amortized but is tested for impairment at least
annually, or more frequently if circumstances indicate potential impairment.
Depending
on the structure of a particular acquisition, goodwill and identifiable intangible assets may not be deductible for tax purposes.
Goodwill recorded in the Asterias Merger is not expected to be deductible for tax purposes (see Note 13).
During
the three and nine months ended September 30, 2019, Lineage incurred $30,000 and $4.4 million, respectively, in acquisition related
costs which were recorded in general and administrative expenses in the accompanying condensed consolidated statements of operations.
Prior
to the Asterias Merger being consummated in March 2019, Lineage elected to account for its 21.7 million shares of Asterias common
stock at fair value using the equity method of accounting. The fair value of the Asterias shares was approximately $20.2 million
as of March 8, 2019, the closing date of the Asterias Merger, based on $0.93 per share, which was calculated by multiplying (a)
$1.31, the closing price of Lineage common shares on such date by (b) the Merger Exchange Ratio. The fair value of the Asterias
shares was approximately $13.5 million as of December 31, 2018, based on the closing price of Asterias common stock of $0.62 per
share on such date. Accordingly, Lineage recorded an unrealized gain of $6.7 million for the nine months ended September 30, 2019,
representing the change in fair value of Asterias common stock from December 31, 2018 to March 8, 2019. For the nine months ended
September 30, 2018, Lineage recorded an unrealized loss of $20.7 million on the Asterias shares due to the decrease in Asterias’
stock price from December 31, 2017 to September 30, 2018 from $2.25 per share to $1.30 per share. All share prices were determined
based on the closing price of Lineage or Asterias common stock on the NYSE American on the applicable dates.
Asterias
Merger Related Litigation - See Note 15 Commitments and Contingencies for discussion regarding litigation related to the Asterias
Merger.
4.
Accounting for Common Stock of OncoCyte, at Fair Value
Lineage
elected to account for its shares of OncoCyte common stock at fair value using the equity method of accounting beginning on February
17, 2017, the date of the OncoCyte Deconsolidation, through September 11, 2019. Lineage sold 2.25 million shares of OncoCyte common
stock for net proceeds of $4.2 million in July 2019. Accordingly, Lineage’s ownership in OncoCyte was reduced from 28% to
24%. Lineage sold an additional 4.0 million shares of OncoCyte common stock for net proceeds of $6.5 million on September 11,
2019. Lineage’s ownership in OncoCyte was further reduced to 16% at this time. Effective September 11, 2019, Lineage began
accounting for its shares of OncoCyte common stock as marketable equity securities. The calculation of fair value is the same
under the equity method and as a marketable equity security.
As
of September 30, 2019, Lineage owned 8.4 million shares of OncoCyte common stock. These shares had a fair value of $17.7 million,
based on the closing price of OncoCyte of $2.10 per share on September 30, 2019. As of December 31, 2018, Lineage had 14.7 million
shares of OncoCyte common stock. These shares had a fair value of $20.3 million, based on the closing price of OncoCyte of $1.38
per share on December 31, 2018.
For
the three months ended September 30, 2019, Lineage recorded a realized gain of $0.6 million due to sales of OncoCyte shares in
the period. Lineage also recorded an unrealized loss of $8.7 million due to the decrease in OncoCyte’s stock price from
$2.49 per share at June 30, 2019 to $2.10 per share at September 30, 2019. $8.3 million of the unrealized loss was recorded as
an unrealized loss on an equity method investment as it was prior to September 11, 2019; the remaining $0.4 million was recorded
as an unrealized loss on marketable equity securities. For the three months ended September 30, 2018, Lineage recorded an unrealized
loss of $0.7 million due to the decrease in OncoCyte’s stock price from $2.55 per share at June 30, 2018 to $2.50 per share
at September 30, 2018.
For
the nine months ended September 30, 2019, Lineage recorded a realized gain of $0.6 million due to sales of OncoCyte shares in
the period. Lineage also recorded an unrealized gain of $7.6 million due to the increase in OncoCyte’s stock price from
$1.38 per share at December 31, 2018 to $2.10 per share at September 30, 2019. $8.0 million of the unrealized gain was recorded
as an unrealized gain on an equity method investment as it was prior to September 11, 2019; the unrealized loss of $0.4 million
was recorded as an unrealized loss on marketable equity securities. For the nine months ended September 30, 2018, Lineage recorded
an unrealized loss of $31.6 million due to the decrease in OncoCyte’s stock price from $4.65 per share at December 31, 2017
to $2.50 per share at September 30, 2018.
All
share prices are determined based on the closing price of OncoCyte common stock on the NYSE American on the applicable dates,
or the last day of trading of the applicable quarter, if the last day of a quarter fell on a weekend.
5.
Sale of Significant Ownership Interest in AgeX to Juvenescence Limited
On
August 30, 2018, Lineage entered into a Stock Purchase Agreement with Juvenescence Limited and AgeX, pursuant to which Lineage
sold 14.4 million shares of common stock of AgeX to Juvenescence for $3.00 per share, or an aggregate purchase price of $43.2
million (the “Purchase Price”). Juvenescence paid $10.8 million of the Purchase Price at closing, issued an unsecured
convertible promissory note dated August 30, 2018 in favor of Lineage for $21.6 million (the “Promissory Note”), and
paid $10.8 million on November 2, 2018. The Stock Purchase Agreement contains customary representations, warranties and indemnities
from Lineage relating to the business of AgeX, including an indemnity cap of $4.3 million, which is subject to certain exceptions.
The transactions contemplated by the Stock Purchase Agreement are referred to as the Juvenescence Transaction in this Report.
The
Promissory Note bears interest at 7% per annum, with principal and accrued interest payable at maturity on August 30, 2020. The
Promissory Note cannot be prepaid prior to maturity or conversion. On the maturity date, if a “Qualified Financing”
(as defined below) has not occurred, Lineage will have the right, but not the obligation, to convert the principal balance of
the Promissory Note and accrued interest then due into Series A preferred shares of Juvenescence at a conversion price of $15.60.
Upon the occurrence of a Qualified Financing on or before the maturity date, the principal balance of the Promissory Note and
accrued interest will automatically convert into a number of shares of the class of equity securities of Juvenescence sold in
the Qualified Financing, at the price per share at which the Juvenescence securities are sold in the Qualified Financing; and,
if AgeX common stock is listed on a national securities exchange in the U.S., the number of shares of the class of equity securities
issuable upon conversion may be increased depending on the market price of AgeX common stock. A Qualified Financing is generally
defined as an underwritten initial public offering of Juvenescence equity securities in which gross proceeds are not less than
$50.0 million. The Promissory Note is not transferable, except in connection with a change of control of Lineage.
For
the three and nine months ended September 30, 2019, Lineage recognized $378,000 and $1,134,000, respectively, in interest income
on the Promissory Note. As of September 30, 2019, the principal and accrued interest balance of the Promissory Note was $23.2
million.
Shareholder
Agreement
Lineage
and Juvenescence entered into a Shareholder Agreement, dated August 30, 2018, setting forth the governance, approval and voting
rights of the parties with respect to their holdings of AgeX common stock, including rights of representation on AgeX’s
board of directors, approval rights, preemptive rights, rights of first refusal and co-sale and drag-along and tag-along rights
for so long as either Lineage or Juvenescence continue to own at least 15% of the outstanding shares of AgeX common stock. Under
the Shareholder Agreement, Juvenescence and Lineage each had the right to designate two persons to a six-member AgeX board of
directors, with the remaining two individuals to be independent of Juvenescence and Lineage. Following Juvenescence’s payment
of $10.8 million on November 2, 2018 under the Stock Purchase Agreement, Juvenescence had the right to designate an additional
member of the AgeX board of directors. As of October 31, 2019, Juvenescence has not exercised such right. Immediately following
the AgeX Distribution on November 28, 2018 (see Note 6), Lineage owned 1.7 million shares of AgeX common stock, representing 4.8%
of AgeX’s then issued and outstanding shares of common stock. Accordingly, in accordance with the Shareholder Agreement,
as of November 28, 2018, Lineage had no right to designate any member to the AgeX board of directors.
In
connection with the Juvenescence Transaction, the termination provision of the Shared Facilities Agreement (see Note 10) entitling
AgeX or Lineage to terminate the agreement upon six months advance written notice was amended. Pursuant to the amendment, following
the AgeX Deconsolidation on August 30, 2018 (see Note 6), each party retained the right to terminate the Shared Facilities
Agreement at any time by giving the other party six months advance written notice, provided that Lineage could not do so prior
to September 1, 2020.
Shared
services with AgeX were terminated on July 31, 2019 with respect to the use of Lineage’s office and laboratory facilities
and September 30, 2019 with respect to all other remaining shared services.
6.
Deconsolidation and Distribution of AgeX
Deconsolidation
of AgeX
On
August 30, 2018, Lineage sold 14.4 million shares of the common stock of AgeX to Juvenescence (see Note 5). Immediately before
that sale, Lineage and Juvenescence owned 80.4% and 5.6%, respectively, of AgeX’s outstanding common stock. Immediately
following that sale, Lineage and Juvenescence owned 40.2% and 45.8%, respectively, of AgeX’s outstanding common stock. As
a result, on August 30, 2018, AgeX was no longer a subsidiary of Lineage and, as of that date, Lineage experienced a “loss
of control” of AgeX, as defined by GAAP. Loss of control is deemed to have occurred when, among other things, a parent company
owns less than a majority of the outstanding common stock of a subsidiary, lacks a controlling financial interest in the subsidiary,
and is unable to unilaterally control the subsidiary through other means such as having, or being able to obtain, the power to
elect a majority of the subsidiary’s board of directors based solely on contractual rights or ownership of shares representing
a majority of the voting power of the subsidiary’s voting securities. All of these loss-of-control factors were present
with respect to Lineage’s ownership interest in AgeX as of August 30, 2018. Accordingly, Lineage deconsolidated AgeX’s
consolidated financial statements and consolidated results from Lineage’s unaudited condensed consolidated financial statements
and consolidated results effective on August 30, 2018, in accordance with ASC, 810-10-40-4(c).
In
connection with the Juvenescence Transaction discussed in Note 5 and the AgeX Deconsolidation on August 30, 2018, in accordance
with ASC 810-10-40-5, Lineage recorded a gain on deconsolidation of $78.5 million, which includes a financial reporting gain on
the sale of the AgeX shares of $39.2 million, during the year ended December 31, 2018, included in other income and expenses,
net, in the consolidated statements of operations.
Distribution
of AgeX Shares
On
November 28, 2018, Lineage distributed 12.7 million shares of AgeX common stock owned by Lineage to holders of Lineage common
shares, on a pro rata basis, in the ratio of one share of AgeX common stock for every 10 common shares of Lineage owned. The AgeX
Distribution was accounted for at fair value as a dividend-in-kind in the aggregate amount of $34.4 million, which was determined
by multiplying (a) the 12.7 million shares distributed to Lineage shareholders by (b) $2.71, the closing price of AgeX common
stock on the NYSE American on November 29, 2018, the first trading day of AgeX common stock.
Because
Lineage has an accumulated deficit in its consolidated shareholders’ equity, the entire fair value of the AgeX Distribution
was charged against common stock equity included in the consolidated statements of changes in shareholders’ equity for the
year ended December 31, 2018.
Immediately
following the AgeX Distribution, Lineage owned 1.7 million shares of AgeX common stock. During the three months ended September
30, 2019, Lineage sold a total of 651,839 shares of AgeX common stock for net proceeds of approximately $1.6 million. As of September
30, 2019, Lineage owns 1.1 million shares of AgeX common stock, which represents approximately 2.8% of AgeX’s outstanding
common stock as of September 30, 2019 and which shares Lineage holds as marketable equity securities.
7.
Property and Equipment, Net
At
September 30, 2019 and December 31, 2018, property and equipment was comprised of the following (in thousands):
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
|
|
(unaudited)
|
|
|
|
|
Equipment, furniture and fixtures
|
|
$
|
4,397
|
|
|
$
|
3,842
|
|
Leasehold improvements
|
|
|
2,848
|
|
|
|
3,910
|
|
Right-of-use assets (1)
|
|
|
5,740
|
|
|
|
-
|
|
Accumulated depreciation and amortization
|
|
|
(4,141
|
)
|
|
|
(3,185
|
)
|
Property and equipment, net
|
|
|
8,844
|
|
|
|
4,567
|
|
Construction in progress
|
|
|
-
|
|
|
|
1,268
|
|
Property and equipment, net, and construction in progress
|
|
$
|
8,844
|
|
|
$
|
5,835
|
|
(1)
|
Lineage
adopted ASC 842 on January 1, 2019. For additional information on this standard and right-of-use assets and liabilities see
Notes 2 and 15.
|
Property
and equipment at both September 30, 2019 and December 31, 2018 includes $146,000 in financing leases. Depreciation and amortization
expense amounted to $253,000 and $254,000 for the three months ended September 30, 2019 and 2018, and $766,000 and $814,000 for
the nine months ended September 30, 2019 and 2018, respectively. During the three months ended September 30, 2019, Lineage sold
equipment with a net book value of $156,000 and recognized a gain of $159,000, which is included in research and development expenses
on the statement of operations.
Construction
in progress
Construction
in progress of $1.3 million as of December 31, 2018 entirely relates to the leasehold improvements made at Cell Cure’s leased
facilities in Jerusalem, Israel, primarily financed by the landlord. The leasehold improvements were substantially completed in
December 2018 and the assets placed in service in January 2019 (see adoption of ASC 842 impact discussed in Notes 2 and 15).
8.
Goodwill and Intangible Assets, Net
At
September 30, 2019 and December 31, 2018, goodwill and intangible assets, net consisted of the following (in thousands):
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
|
|
(unaudited)
|
|
|
|
|
Goodwill(1)
|
|
$
|
12,977
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
Acquired IPR&D - OPC1 (from the Asterias Merger) (2)
|
|
$
|
31,700
|
|
|
$
|
-
|
|
Acquired IPR&D - VAC2 (from the Asterias Merger) (2)
|
|
|
14,840
|
|
|
|
-
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
Acquired patents
|
|
|
18,953
|
|
|
|
19,010
|
|
Acquired royalty contracts (2)
|
|
|
650
|
|
|
|
|
|
Other
|
|
|
-
|
|
|
|
10
|
|
Total intangible assets
|
|
|
66,143
|
|
|
|
19,020
|
|
Accumulated amortization
|
|
|
(17,397
|
)
|
|
|
(15,895
|
)
|
Intangible assets, net
|
|
$
|
48,746
|
|
|
$
|
3,125
|
|
(1)
|
Goodwill
represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired
and liabilities assumed in the Asterias Merger (see Note 3).
|
|
|
(2)
|
See
Note 3 for information on the Asterias Merger which was consummated on March 8, 2019.
|
Lineage
recognized in research and development expenses $0.5 million and $0.6 million of amortization expense in the three months ended
September 30, 2019 and 2018, respectively, and $1.4 million and $1.8 million in the nine months ended September 30, 2019 and 2018,
respectively.
9.
Accounts Payable and Accrued Liabilities
At
September 30, 2019 and December 31, 2018, accounts payable and accrued liabilities consisted of the following (in thousands):
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
|
|
(unaudited)
|
|
|
|
|
Accounts
payable (1)
|
|
$
|
2,009
|
|
|
$
|
2,359
|
|
Accrued
compensation
|
|
|
1,926
|
|
|
|
2,456
|
|
Accrued
liabilities
|
|
|
904
|
|
|
|
1,639
|
|
Other
current liabilities
|
|
|
3
|
|
|
|
9
|
|
Total
|
|
$
|
4,842
|
|
|
$
|
6,463
|
|
(1)
|
Includes
$0.1 million of transaction costs related to the Asterias Merger (see Note 3) recorded outside of the business combination.
|
In
connection with the Asterias Merger, several Asterias employees were terminated as of the Asterias Merger date. Three of these
employees had employment agreements with Asterias which entitled them to change in control and separation payments in the aggregate
of $2.0 million, which such conditions were met on the Asterias Merger date. Accordingly, $2.0 million was accrued and recorded
in general and administrative expenses on the merger date and paid in April 2019.
Additionally,
Lineage entered into a plan of termination with substantially all other previous employees of Asterias with potential separation
payments in the aggregate of $0.5 million. Termination dates for these individuals ranged from May 31, 2019 to June 28, 2019.
These employees were required to provide services related to the transition and be an employee of the combined company as of their
date of termination in order to receive separation benefits. Since the employees were required to render future services after
the merger date, Lineage recorded the aggregate liability ratably over their respective service periods from the Asterias Merger
date through the above termination dates, in accordance with ASC 420, Exit or Disposal Cost Obligations. All payments were
completed by July 31, 2019.
In
connection with the planned relocation of Lineage’s corporate headquarters to Carlsbad, California, discussed in Note 15,
Lineage entered into a plan of termination with certain Lineage employees with potential separation payments in the aggregate
of $0.7 million. Termination dates for these individuals range from August 9, 2019 to September 30, 2019. These employees had
to provide services related to the transition of services and activities in connection with the relocation and be an employee
of Lineage as of their date of termination in order to receive separation benefits. Lineage recorded the aggregate liability ratably
over their respective service periods from June through the above termination dates, in accordance with ASC 420. As of September
30, 2019, a total of $0.2 million of separation payments had been made, and the remaining $0.5 million was accrued for payments
expected to be made in the fourth quarter of 2019.
10.
Related Party Transactions
Shared
Facilities and Service Agreements with Affiliates
The
receivables from affiliates shown on the condensed consolidated balance sheet as of December 31, 2018, primarily represent amounts
owed to Lineage by OncoCyte and AgeX under separate Shared Facilities and Service Agreements (each a “Shared Facilities
Agreement”), with amounts owed by OncoCyte comprising most of that amount. These outstanding amounts were paid in full in
the first quarter of 2019. Under the terms of the Shared Facilities Agreements, Lineage allowed OncoCyte and AgeX to use Lineage’s
premises and equipment located at Lineage’s headquarters in Alameda, California for the purpose of conducting business.
Lineage also provided accounting, billing, bookkeeping, payroll, treasury, payment of accounts payable, and other similar administrative
services to OncoCyte and AgeX. The Shared Facilities Agreements also allowed Lineage to provide the services of attorneys, accountants,
and other professionals who may provide professional services to Lineage. Lineage also provided OncoCyte and AgeX with the services
of laboratory and research personnel, including Lineage employees and contractors, for the performance of research and development
work for OncoCyte and AgeX at the premises. Shared services with AgeX were terminated on July 31, 2019 with respect to the use
of Lineage’s office and laboratory facilities and September 30, 2019 with respect to all other remaining shared services.
Shared services with OncoCyte were terminated on September 30, 2019, except for the use of Lineage’s office and laboratory
facilities, which remains in place.
Lineage
charged AgeX a “Use Fee” for services provided and for use of Lineage facilities, equipment, and supplies. For each
billing period, Lineage prorated and allocated to OncoCyte and AgeX costs incurred, including costs for services of Lineage employees
and use of equipment, insurance, leased space, professional services, software licenses, supplies and utilities. The allocation
of costs depended on key cost drivers, including actual documented use, square footage of facilities used, time spent, costs incurred
by Lineage for OncoCyte and AgeX, or upon proportionate usage by Lineage, OncoCyte and AgeX, as reasonably estimated by Lineage.
Lineage, at its discretion, had the right to charge OncoCyte and AgeX a 5% markup on such allocated costs. The allocated cost
of Lineage employees and contractors who provided services was based upon the number of hours or estimated percentage of efforts
of such personnel devoted to the performance of services.
The
Use Fee was determined and invoiced to OncoCyte and AgeX on a regular basis, generally monthly or quarterly. Each invoice was
payable in full within 30 days after receipt. Any invoice, or portion thereof, not paid in full when due bore interest at the
rate of 15% per annum until paid, unless the failure to make a payment was due to any inaction or delay in making a payment by
Lineage. Through September 30, 2019, Lineage did not charge OncoCyte or AgeX any interest.
In
addition to the Use Fee, OncoCyte and AgeX reimbursed Lineage for any out of pocket costs incurred by Lineage for the purchase
of office supplies, laboratory supplies, and other goods and materials and services for the account or use of OncoCyte or AgeX.
Lineage was not obligated to purchase or acquire any office supplies or other goods and materials or any services for OncoCyte
or AgeX, and if any such supplies, goods, materials or services were obtained, Lineage could arrange for the suppliers to invoice
OncoCyte or AgeX directly.
In
the aggregate, Lineage charged Use Fees to OncoCyte and AgeX as follows (in thousands):
|
|
Three Months Ended
September 30,
(unaudited)
|
|
|
Nine Months Ended
September 30,
(unaudited)
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Research and development
|
|
$
|
301
|
|
|
$
|
355
|
|
|
$
|
1,285
|
|
|
$
|
792
|
|
General and administrative
|
|
|
236
|
|
|
|
187
|
|
|
|
647
|
|
|
|
533
|
|
Total use fees
|
|
$
|
537
|
|
|
$
|
542
|
|
|
$
|
1,932
|
|
|
$
|
1,325
|
|
The
Use Fees charged to OncoCyte and AgeX shown above are not reflected in revenues, but instead Lineage’s general and administrative
expenses and research and development expenses are shown net of those charges in the condensed consolidated statements of operations.
Lineage
accounts for receivables from affiliates, net of payables to affiliates, if any, for similar shared services and other transactions
Lineage’s consolidated subsidiaries may enter into with nonconsolidated affiliates. Lineage and the affiliates record those
receivables and payables on a net basis since Lineage and the affiliates intend to exercise a right of offset of the receivable
and the payable and to settle the balances net by having the party that owes the other party pay the net balance owed.
Transactions
with Ascendance Biotechnology, Inc.
On
March 21, 2018, AgeX and Ascendance Biotechnology, Inc. (“Ascendance”), an equity method investee of AgeX and former
equity method investee of Lineage, entered into an Asset Purchase Agreement (the “Asset Agreement”) in which AgeX
purchased for $800,000 in cash certain assets consisting primarily of in-process research and development assets related to stem
cell derived cardiomyocytes (heart muscle cells) to be developed by AgeX. The transaction was considered an asset acquisition
rather than a business combination in accordance with ASC 805. Accordingly, the $800,000 purchase price was expensed on the acquisition
date as acquired in-process research and development as those assets have no alternative future use. Also, on March 21, 2018,
Lineage received $0.2 million from Ascendance as settlement of its accounts receivable from Ascendance.
Disposition
of ownership interest in Ascendance
On
March 23, 2018, Ascendance was acquired by a third party in a merger through which AgeX received approximately $3.2 million in
cash for its shares of Ascendance common stock. AgeX recognized a $3.2 million gain on the sale of its equity method investment
in Ascendance, which is included in other income and expenses, net, for the nine months ended September 30, 2018.
Other
related party transactions
In
February 2018, Alfred D. Kingsley, the Chairman of our board of directors and a former officer and director of AgeX, purchased
AgeX stock purchase warrants entitling him to purchase 248,600 shares of AgeX common stock at an exercise price of $2.50 per share.
AgeX received $124,300, or $0.50 per warrant, from Mr. Kingsley. The warrants were sold to Mr. Kingsley on the same terms as other
warrants were sold by AgeX to other unaffiliated investors.
Lineage
currently pays $5,050 per month for the use of approximately 900 square feet of office space in New York City, which is made available
to Lineage on a month-by-month basis by one of its directors at an amount that approximates his cost (see Note 15).
In
April 2019, Lineage issued 251,835 common shares of Lineage to Broadwood Partners, L.P., an Asterias and Lineage shareholder,
in exchange for the settlement of Asterias Warrants in connection with the Asterias Merger (see Note 3).
In
connection with the putative shareholder class action lawsuit filed in February 2019 challenging the Asterias Merger (see Note
15), Lineage has agreed to pay for the legal defense of Neal Bradsher, director, and Broadwood Partners, L.P., a shareholder of
Lineage, and Broadwood Capital, Inc., which manages Broadwood Partners, L.P., all of which were named in the lawsuit. Through
September 30, 2019, Lineage has incurred a total of $170,000 in legal expenses on behalf of the director, shareholder and the
manager of the shareholder.
As
part of financing transactions, Broadwood Partners, L.P. purchased 1,000,000 shares and 2,000,000 shares of OncoCyte common stock
from Lineage in July 2019 and September 2019, respectively.
11.
Shareholders’ Equity
Preferred
Shares
Lineage
is authorized to issue 2,000,000 preferred shares. The preferred shares may be issued in one or more series as our board of directors
may determine by resolution. Our board of directors is authorized to fix the number of shares of any series of preferred shares
and to determine or alter the rights, preferences, privileges, and restrictions granted to or imposed on the preferred shares
as a class, or upon any wholly unissued series of any preferred shares. Our board of directors may, by resolution, increase or
decrease (but not below the number of shares of such series then outstanding) the number of shares of any series of preferred
shares subsequent to the issue of shares of that series. There are no preferred shares issued and outstanding.
Common
Shares
At
September 30, 2019, Lineage was authorized to issue 250,000,000 common shares, no par value. As of September 30, 2019, and December
31, 2018, Lineage had 149,790,387 and 127,135,774 issued and outstanding common shares, respectively.
In
April 2017, 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 offer and sell,
from time to time, through Cantor Fitzgerald, common shares of Lineage having an aggregate offering price of up to $25,000,000.
Lineage is not obligated to sell any shares under the Sales Agreement. Subject to the terms and conditions of the Sales Agreement,
Cantor Fitzgerald will use commercially reasonable efforts, consistent with its normal trading and sales practices, applicable
state and federal law, rules and regulations, and the rules of the NYSE American, to sell the shares from time to time based upon
Lineage’s instructions, including any price, time or size limits specified by Lineage. Under the Sales Agreement, Cantor
Fitzgerald may sell the shares by any method deemed to be an “at-the-market” offering as defined in Rule 415(a)(4)
under the Securities Act of 1933, as amended, or by any other method permitted by law, including in privately negotiated transactions.
Cantor Fitzgerald’s obligations to sell the shares under the Sales Agreement are subject to satisfaction of certain conditions,
including the continued effectiveness of Lineage’s Registration Statement on Form S-3, which became effective on May 5,
2017. As of September 30, 2019, $24.1 million remained available for sale through the Sales Agreement.
Lineage
agreed to pay Cantor Fitzgerald a commission of 3.0% of the aggregate gross proceeds from each sale of shares, reimburse legal
fees and disbursements and provide Cantor Fitzgerald with customary indemnification and contribution rights. The Sales Agreement
may be terminated by Cantor Fitzgerald or Lineage at any time upon notice to the other party, or by Cantor Fitzgerald at any time
in certain circumstances, including the occurrence of a material and adverse change in Lineage’s business or financial condition
that makes it impractical or inadvisable to market the shares or to enforce contracts for the sale of the shares.
Reconciliation
of Changes in Shareholders’ Equity
The
following table documents the changes in shareholders’ equity for the three and nine months ended September 30, 2019 (unaudited
and in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Preferred
Shares
|
|
|
Common
Shares
|
|
|
|
|
|
Noncontrolling
|
|
|
Other
|
|
|
Total
|
|
|
|
Number
|
|
|
|
|
|
Number
|
|
|
|
|
|
Accumulated
|
|
|
Interest/
|
|
|
Comprehensive
|
|
|
Shareholders’
|
|
|
|
of Shares
|
|
|
Amount
|
|
|
of Shares
|
|
|
Amount
|
|
|
Deficit
|
|
|
(Deficit)
|
|
|
Income
|
|
|
Equity
|
|
BALANCE
AT DECEMBER 31, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
127,136
|
|
|
$
|
354,270
|
|
|
$
|
(261,856
|
)
|
|
$
|
(1,594
|
)
|
|
$
|
1,426
|
|
|
$
|
92,246
|
|
Shares
issued in connection with the Asterias Merger
|
|
|
-
|
|
|
|
-
|
|
|
|
24,696
|
|
|
|
32,353
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
32,353
|
|
Shares
retired in connection with the Asterias Merger
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,622
|
)
|
|
|
(3,435
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,435
|
)
|
Shares
issued upon vesting of restricted stock units, net of shares retired to pay employees’ taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
118
|
|
|
|
(75
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(75
|
)
|
Stock-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,361
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation for shares issued upon vesting of Asterias restricted stock units attributable to post combination services
|
|
|
-
|
|
|
|
-
|
|
|
|
60
|
|
|
|
79
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
79
|
|
Adjustment
upon adoption of leasing standard
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
143
|
|
|
|
-
|
|
|
|
-
|
|
|
|
143
|
|
Foreign
currency translation loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(732
|
)
|
|
|
(732
|
)
|
NET
INCOME/(LOSS)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
39,310
|
|
|
|
(14
|
)
|
|
|
-
|
|
|
|
39,296
|
|
BALANCE
AT MARCH 31, 2019
|
|
|
-
|
|
|
$
|
-
|
|
|
|
149,388
|
|
|
$
|
384,553
|
|
|
$
|
(222,403
|
)
|
|
$
|
(1,608
|
)
|
|
$
|
694
|
|
|
$
|
161,236
|
|
Shares
issued for settlement of Lineage Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
252
|
|
|
|
302
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
302
|
|
Shares
issued upon vesting of restricted stock units, net of shares retired to pay employees’ taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
Stock-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
762
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
762
|
|
Foreign
currency translation loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(487
|
)
|
|
|
(487
|
)
|
NET
LOSS
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(30,032
|
)
|
|
|
(20
|
)
|
|
|
-
|
|
|
|
(30,052
|
)
|
BALANCE
AT JUNE 30, 2019
|
|
|
—
|
|
|
$
|
-
|
|
|
|
149,643
|
|
|
$
|
385,615
|
|
|
$
|
(252,435
|
)
|
|
$
|
(1,628
|
)
|
|
$
|
207
|
|
|
$
|
131,759
|
|
Shares
issued upon vesting of restricted stock units, net of shares retired to pay employees’ taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
54
|
|
|
|
(23
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(23
|
)
|
Stock-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
759
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
759
|
|
Shares
issued through ATM
|
|
|
-
|
|
|
|
-
|
|
|
|
93
|
|
|
|
103
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
103
|
|
Foreign
currency translation loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(564
|
)
|
|
|
(564
|
)
|
NET
LOSS
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(16,505
|
)
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
(16,515
|
)
|
BALANCE
AT SEPTEMBER 30, 2019
|
|
|
—
|
|
|
$
|
-
|
|
|
|
149,790
|
|
|
$
|
386,454
|
|
|
$
|
(268,940
|
)
|
|
$
|
(1,638
|
)
|
|
$
|
(357
|
)
|
|
$
|
115,519
|
|
The
following table documents the changes in shareholders’ equity for the three and nine months ended September 30, 2018 (unaudited
and in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Preferred
Shares
|
|
|
Common
Shares
|
|
|
|
|
|
Noncontrolling
|
|
|
Other
|
|
|
Total
|
|
|
|
Number
|
|
|
|
|
|
Number
|
|
|
|
|
|
Accumulated
|
|
|
Interest/
|
|
|
Comprehensive
|
|
|
Shareholders’
|
|
|
|
of Shares
|
|
|
Amount
|
|
|
of Shares
|
|
|
Amount
|
|
|
Deficit
|
|
|
(Deficit)
|
|
|
Income
|
|
|
Equity
|
|
BALANCE
AT DECEMBER 31, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
126,866
|
|
|
$
|
378,487
|
|
|
$
|
(216,297
|
)
|
|
$
|
1,622
|
|
|
$
|
451
|
|
|
$
|
164,263
|
|
Cumulative-effect
adjustment for adoption of ASU 2016-01 on January 1, 2018
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
328
|
|
|
|
-
|
|
|
|
(328
|
)
|
|
|
-
|
|
Cumulative-effect
adjustment for adoption of Accounting Standard Codification, Topic 606, on January 1, 2018
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
101
|
|
|
|
-
|
|
|
|
-
|
|
|
|
101
|
|
Shares
issued upon vesting of restricted stock units, net of shares retired to pay employees’ taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
(7
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7
|
)
|
Stock-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
809
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
809
|
|
Stock-based
compensation in subsidiaries
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
175
|
|
|
|
-
|
|
|
|
175
|
|
Sale
of subsidiary warrants in AgeX
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
737
|
|
|
|
-
|
|
|
|
737
|
|
Subsidiary
financing transactions with noncontrolling interests - AgeX
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(103
|
)
|
|
|
-
|
|
|
|
103
|
|
|
|
-
|
|
|
|
-
|
|
Foreign
currency translation adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
75
|
|
|
|
75
|
|
NET
LOSS
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(63,548
|
)
|
|
|
(150
|
)
|
|
|
-
|
|
|
|
(63,698
|
)
|
BALANCE
AT MARCH 31, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
126,869
|
|
|
$
|
379,186
|
|
|
$
|
(279,416
|
)
|
|
$
|
2,487
|
|
|
$
|
198
|
|
|
$
|
102,455
|
|
Shares
issued upon vesting of restricted stock units, net of shares retired to pay employees’ taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
|
|
(5
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5
|
)
|
Stock-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
825
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
825
|
|
Stock-based
compensation of subsidiaries
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
278
|
|
|
|
-
|
|
|
|
278
|
|
Additional
adjustment for ASC Topic 606
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
Sale
of subsidiary shares in AgeX
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,000
|
|
|
|
-
|
|
|
|
5,000
|
|
Subsidiary
financing transactions with noncontrolling interests - AgeX
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,634
|
|
|
|
-
|
|
|
|
(3,634
|
)
|
|
|
-
|
|
|
|
-
|
|
Subsidiary
financing and other transactions with noncontrolling interests – Cell Cure
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(111
|
)
|
|
|
-
|
|
|
|
70
|
|
|
|
-
|
|
|
|
(41
|
)
|
Foreign
currency translation adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
884
|
|
|
|
884
|
|
NET
LOSS
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,215
|
)
|
|
|
(431
|
)
|
|
|
-
|
|
|
|
(4,646
|
)
|
BALANCE
AT JUNE 30, 2018
|
|
|
-
|
|
|
|
-
|
|
|
|
126,874
|
|
|
$
|
383,529
|
|
|
$
|
(283,630
|
)
|
|
$
|
3,770
|
|
|
$
|
1,082
|
|
|
$
|
104,751
|
|
Stock-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,272
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,272
|
|
Stock-based
compensation of subsidiaries
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
38
|
|
|
|
-
|
|
|
|
38
|
|
Deconsolidation
of AgeX
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(164
|
)
|
|
|
-
|
|
|
|
(3,467
|
)
|
|
|
-
|
|
|
|
(3,631
|
)
|
Subsidiary
financing and other transactions with noncontrolling interests – Cell Cure
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,975
|
|
|
|
-
|
|
|
|
(1,973
|
)
|
|
|
-
|
|
|
|
2
|
|
Sales
subsidiary shares and warrants and other transactions - AgeX
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
259
|
|
|
|
-
|
|
|
|
244
|
|
|
|
-
|
|
|
|
503
|
|
Shares
issued upon vesting of restricted stock units, net of shares retired to pay employees’ taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
10
|
|
|
|
(13
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(13
|
)
|
Foreign
currency translation adjustments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
92
|
|
|
|
92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME/(LOSS)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
66,725
|
|
|
|
(181
|
)
|
|
|
-
|
|
|
|
66,544
|
|
BALANCE
AT SEPTEMBER 30, 2018
|
|
|
—
|
|
|
|
-
|
|
|
|
126,884
|
|
|
$
|
386,858
|
|
|
$
|
(216,905
|
)
|
|
$
|
(1,569
|
)
|
|
$
|
1,174
|
|
|
$
|
169,558
|
|
Warrants
Lineage
(previously Asterias) Warrants - Liability Classified
In
March 2019, in connection with the closing of the Asterias Merger, Lineage assumed outstanding Asterias Warrants. As of September
30, 2019, the total number of common shares of Lineage subject to warrants that were assumed by Lineage in connection with the
Asterias Merger was 1,089,900, which were converted to Lineage Warrants 30 days after the closing of the Asterias Merger, with
similar terms and conditions retained under the Lineage Warrants as per the original Warrant Agreements. The Lineage Warrants
have an exercise price of $6.15 per warrant share and expire on May 13, 2021. Lineage is accounting for the outstanding Lineage
Warrants as a liability at fair value, with subsequent changes to the fair value of the Lineage Warrants at each reporting period
thereafter included in the consolidated statement of operations (see Note 3).
For
the three and nine months ended months ended September 30, 2019, Lineage recorded an unrealized gain of $38,000 and
$245,000, respectively, due to the decline in the fair value of the Lineage Warrants from the Asterias Merger date through
September 30, 2019. As of September 30, 2019, the fair value of the Lineage Warrants was $251,000 included in long-term liabilities
on the condensed consolidated balance sheets.
Cell
Cure Warrants - Liability Classified
Cell
Cure has two sets of issued warrants. Warrants to purchase 24,566 Cell Cure ordinary shares at an exercise price of $40.5359 were
issued to HBL in July 2017. These warrants expire in July 2022. Warrants to purchase 13,738 Cell Cure ordinary shares at exercise
prices ranging from $32.02 to $40.00 per share have been issued to consultants. These warrants expire in October 2020 and January
2024.
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.
As
of September 30, 2019 and December 31, 2018, the total value of all warrants issued by Cell Cure was $0.3 million and $0.4 million,
respectively. Such warrants are classified as long-term liabilities on the condensed consolidated balance sheets.
12.
Stock-Based Awards
Equity
Incentive Plan Awards
Effective
November 8, 2019, Lineage adopted an amendment changing the name of the BioTime, Inc. 2012 Equity Incentive 2012 Plan to the Lineage
Cell Therapeutics, Inc. 2012 Equity Incentive Plan (the “2012 Plan”). The 2012 provides for the grant of stock options,
restricted stock, restricted stock units and stock appreciation rights. As of September 30, 2019, a maximum of 24,000,000 common
shares were available for grant under the 2012 Plan.
A
summary of Lineage’s 2012 Plan activity and other stock option awards granted outside of the 2012 Plan related information
is as follows (in thousands, except per share amounts):
|
|
Shares
Available
for Grant
|
|
|
Number
of Options
Outstanding
|
|
|
Number
of RSUs
Outstanding
|
|
|
Weighted
Average
Exercise Price
|
|
December 31, 2018
|
|
|
1,885
|
|
|
|
13,867
|
|
|
|
402
|
|
|
$
|
2.44
|
|
AgeX distribution adjustment
|
|
|
117
|
|
|
|
(2
|
)
|
|
|
3
|
|
|
|
-
|
|
Restricted stock units vested
|
|
|
-
|
|
|
|
-
|
|
|
|
(218
|
)
|
|
|
-
|
|
Additional shares added to Plan
|
|
|
8,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
(3,526
|
)
|
|
|
3,526
|
|
|
|
-
|
|
|
|
1.07
|
|
Options exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options expired/forfeited/cancelled
|
|
|
1,883
|
|
|
|
(1,883
|
)
|
|
|
-
|
|
|
|
2.04
|
|
September 30, 2019
|
|
|
8,359
|
|
|
|
15,508
|
|
|
|
187
|
|
|
$
|
2.18
|
|
Options exercisable at September 30, 2019
|
|
|
|
|
|
|
9,872
|
|
|
|
|
|
|
$
|
2.55
|
|
At
the effective time of the Asterias Merger, Lineage assumed sponsorship of the Asterias 2013 Equity Incentive Plan (the “Asterias
Equity Plan”), with references to Asterias and Asterias common stock therein to be deemed references to Lineage and Lineage
common shares. There were 7,309,184 shares available under the Asterias Equity Plan immediately before the closing of the Asterias
Merger, which became 5,189,520 shares immediately following the Asterias Merger. The shares available under the Asterias Equity
Plan will be for awards granted to those former Asterias employees who continued as Lineage employees upon consummation of the
Asterias Merger. A summary of activity under the Asterias Equity Plan from the closing date of the Asterias Merger through September
30, 2019 is as follows (in thousands, except per share amounts):
|
|
Shares
Available
for Grant
|
|
|
Number
of Options
Outstanding
|
|
|
Number
of RSUs
Outstanding
|
|
|
Weighted
Average
Exercise Price
|
|
March 8, 2019
|
|
|
5,190
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
Options granted
|
|
|
(490
|
)
|
|
|
490
|
|
|
|
-
|
|
|
|
1.59
|
|
Options exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options forfeited
|
|
|
140
|
|
|
|
(140
|
)
|
|
|
-
|
|
|
|
1.63
|
|
September 30, 2019
|
|
|
4,840
|
|
|
|
350
|
|
|
|
-
|
|
|
|
1.57
|
|
Options exercisable at September 30, 2019
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
$
|
-
|
|
Stock-based
compensation expense
The
fair value of each option award is estimated on the date of grant using a Black-Scholes option pricing model applying the weighted-average
assumptions noted in the following table:
|
|
Nine Months Ended
September 30, (unaudited)
|
|
|
|
2019
|
|
|
2018
|
|
Expected life (in years)
|
|
|
6.01
|
|
|
|
5.68
|
|
Risk-free interest rates
|
|
|
2.2
|
%
|
|
|
2.8
|
%
|
Volatility
|
|
|
60.9
|
%
|
|
|
66.2
|
%
|
Dividend yield
|
|
|
-
|
%
|
|
|
-
|
%
|
Operating
expenses include stock-based compensation expense as follows (in thousands):
|
|
Three Months Ended September 30, (unaudited)
|
|
|
Nine Months Ended
September 30, (unaudited)
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Research and development
|
|
$
|
135
|
|
|
$
|
166
|
|
|
$
|
418
|
|
|
$
|
548
|
|
General and administrative
|
|
|
624
|
|
|
|
1,144
|
|
|
|
2,543
|
|
|
|
2,849
|
|
Total stock-based compensation expense
|
|
$
|
759
|
|
|
$
|
1,310
|
|
|
$
|
2,961
|
|
|
$
|
3,397
|
|
The
expense related to 84,940 shares of Asterias restricted stock unit awards that immediately vested on the closing of the Asterias
Merger and converted into the right to receive common shares of Lineage based on the Merger Exchange Ratio, resulting in 60,304
common shares of Lineage issued on March 8, 2019, was included in stock-based compensation expense for the nine months ended September
30, 2019. The expense was not included as part of the purchase price of the Asterias Merger because these awards were principally
attributable to post-combination services.
13.
Income Taxes
The
provision for income taxes for interim periods is generally determined using an estimated annual effective tax rate as prescribed
by ASC 740-270, Income Taxes, Interim Reporting. The effective tax rate may be subject to fluctuations during the year
as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors
such as valuation allowances and changes in valuation allowances against deferred tax assets, the recognition or de-recognition
of tax benefits related to uncertain tax positions, if any, and changes in or the interpretation of tax laws in jurisdictions
where Lineage conducts business. ASC 740-270 also states that if an entity is unable to reliably estimate some or a part of its
ordinary income or loss, the income tax provision or benefit applicable to the item that cannot be estimated shall be reported
in the interim period in which the item is reported.
For
items that Lineage cannot reliably estimate on an annual basis (principally unrealized gains or losses generated by changes in
the market prices of the OncoCyte, and AgeX shares of common stock Lineage holds, and prior to March 8, 2019, Asterias shares
Lineage held), Lineage uses the actual year to date effective tax rate rather than an estimated annual effective tax rate to determine
the tax effect of each item, including the use of all available net operating losses and other credits or deferred tax assets.
Although
the OncoCyte Deconsolidation was not a taxable transaction to Lineage and did not create a current income tax payment obligation
to Lineage, the market value of the shares of OncoCyte common stock Lineage holds creates a deferred tax liability to Lineage
based on the closing prices of the shares, less Lineage’s tax basis in the shares. The deferred tax liability generated
by the OncoCyte shares that Lineage holds as of September 30, 2019, is a source of future taxable income to Lineage, as prescribed
by ASC 740-10-30-17, that will more likely than not result in the realization of its deferred tax assets to the extent of the
deferred tax liability. This deferred tax liability is determined based on the closing prices of the OncoCyte shares as of September
30, 2019. Due to the inherent unpredictability of future prices of those shares, Lineage cannot reliably estimate or project those
deferred tax liabilities on an annual basis. Therefore, the deferred tax liability pertaining to OncoCyte shares, determined based
on the actual closing prices on the last stock market trading day of the applicable accounting period, and the related impacts
to the valuation allowance and deferred tax asset changes, are recorded in the accounting period in which they occur.
Prior
to the Asterias Merger discussed in Note 3, the Asterias shares of common stock Lineage held generated similar deferred tax liabilities
to Lineage as the OncoCyte shares discussed above. As of the Asterias Merger date and due to Asterias becoming a wholly owned
subsidiary of Lineage, the Asterias deferred tax liabilities were eliminated with a corresponding adjustment to Lineage’s
valuation allowance, resulting in no tax provision or benefit from this adjustment.
On
March 23, 2018, Ascendance was acquired by a third party in a merger through which AgeX received approximately $3.2 million in
cash for its shares of Ascendance common stock. For financial reporting purposes, AgeX recognized a $3.2 million gain as a sale
of its equity method investment in Ascendance. The sale was a taxable transaction to AgeX generating a taxable gain of approximately
$2.2 million. Lineage had sufficient losses from operations to offset the entire gain resulting in no income taxes due.
The
income tax consequences of the AgeX Deconsolidation are discussed below.
The
Juvenescence Transaction discussed in Note 5 was a taxable event for Lineage that resulted in a gross taxable gain of approximately
$29.4 million, which Lineage fully offset with available net operating losses (“NOL”) and NOL carryforwards, resulting
in no net income taxes due. Although the AgeX Deconsolidation on August 30, 2018 was not a taxable transaction to Lineage and
did not result in a current tax payment obligation, the unrealized financial reporting gain (see Note 6) on the AgeX Deconsolidation
generated a deferred tax liability in accordance with ASC 740, primarily representing Lineage’s difference between book
and tax basis of AgeX common stock on the AgeX Deconsolidation date. This deferred tax liability was fully offset by a corresponding
release of Lineage’s valuation allowance on deferred tax assets, resulting in no income tax provision or benefit from the
AgeX Deconsolidation. The deferred tax liabilities on Lineage’s investments in OncoCyte, Asterias and AgeX are considered
to be sources of taxable income as prescribed by ASC 740-10-30-17 that will more likely than not result in the realization of
its deferred tax assets to the extent of those deferred tax liabilities, thereby reducing the need for a valuation allowance.
The
distribution of AgeX shares of common stock to Lineage shareholders (see Note 6) on November 28, 2018 was a taxable event for
Lineage that resulted in a gross taxable gain of approximately $26.4 million, which was fully offset by NOL carryforwards, resulting
in no income taxes due.
In
connection with the Asterias Merger, a deferred tax liability of $13.0 million was recorded as part of the acquisition accounting
(see Note 3). The deferred tax liability (“DTL”) is related to fair value adjustments for the assets and liabilities
acquired in the Asterias Merger, principally consisting of IPR&D. This estimate of deferred taxes was determined based on
the excess of the estimated fair values of the acquired assets and liabilities over the tax basis of the assets and liabilities
acquired. The statutory tax rate was applied, as appropriate, to the adjustment based on the jurisdiction in which the adjustment
is expected to occur. This estimate of deferred income tax liabilities is preliminary and is subject to change based upon Lineage’s
final determination of the fair value of assets acquired and liabilities assumed. Because the IPR&D (prior to completion or
abandonment of the R&D) is considered an indefinite-lived asset for accounting purposes, the fair value of the IPR&D on
the acquisition date creates a deferred income tax liability in accordance with ASC 740. This DTL is computed using the fair value
of the IPR&D assets on the acquisition date multiplied by Lineage’s respective federal and state income tax rates. While
this DTL would reverse on impairment or sale or commencement of amortization of the related intangible assets, those events are
not anticipated under ASC 740 for purposes of predicting reversal of a temporary difference to support the realization of deferred
tax assets, except for certain deferred tax assets and credit carryforwards that are also indefinite in nature as of the Asterias
Merger date, which may be considered for reversal under ASC 740 as further discussed below.
A
valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized.
For federal and state income tax purposes, as a result of the deconsolidation of AgeX, Asterias and OncoCyte and the deferred
tax liabilities generated from the market values of AgeX, Asterias and OncoCyte shares from the respective deconsolidation dates,
including the changes to those deferred tax liabilities due to changes in the AgeX, Asterias and OncoCyte stock prices, Lineage’s
deferred tax assets exceeded its deferred tax liabilities as of December 31, 2018. As a result, 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.
For
the three and nine months ended September 30, 2019, Lineage reversed a portion of its valuation allowance. The partial reversal
of the historical valuation allowance is related to Lineage’s deferred tax assets and credit carryforwards and is due to
the acquired taxable temporary differences, primarily consisting of the acquired IPR&D discussed above and in Notes 3 and
8. ASC 740 allows for deferred tax assets and credit carryforwards, that are both available and indefinite in nature, to be used
against similar deferred tax liabilities as a source of income to support the realization of those deferred tax assets and credit
carryforwards. Any benefit recognized from such a reversal of the valuation allowance is recorded outside of the acquisition accounting.
Accordingly, the $1.0 million and $6.6 million valuation allowance release and the corresponding tax benefits were primarily related
to state research and development credits, including current year federal net operating losses generated for the three and nine
months ended September 30, 2019, respectively, both of which are available and indefinite in nature.
Lineage
did not record any provision or benefit for income taxes for the three and nine months ended September 30, 2018 as Lineage had
a full valuation allowance for the periods presented.
14.
Supplemental Cash Flow Information
Non-cash
investing and financing transactions presented separately from the condensed consolidated statements of cash flows for the nine
months ended September 30, 2019 and 2018 are as follows (in thousands):
|
|
Nine Months Ended
September 30, (unaudited)
|
|
|
|
2019
|
|
|
2018
|
|
Supplemental disclosures of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Issuance of common shares for the Asterias Merger (Note 3)
|
|
$
|
32,353
|
|
|
$
|
-
|
|
Assumption of liabilities in the Asterias Merger (Note 3)
|
|
|
1,136
|
|
|
|
-
|
|
Assumptions of warrants in the Asterias Merger (Note 3)
|
|
|
867
|
|
|
|
-
|
|
Issuance of common shares for settlement of Lineage Warrants
|
|
|
332
|
|
|
|
-
|
|
15.
Commitments and Contingencies
Alameda
Lease
In
December 2015, Lineage entered into a lease for approximately 30,795 square feet of rentable space in two buildings located in
an office park in Alameda, California (the “Alameda Lease”). The term of the Alameda Lease commenced effective February
1, 2016 and expires on January 31, 2023, unless Lineage exercises its option to renew the lease for an additional five years.
Base
rent under the Alameda Lease beginning on February 1, 2019 is $70,521 per month and will increase by approximately 3% annually
on every February 1 thereafter during the lease term.
Prior
to the adoption of ASC 842 on January 1, 2019 (see Note 2), the lease payments allocated to the lease liability for leasehold
improvements reimbursed by the landlord were amortized as debt service on that liability using the effective interest method over
the lease term.
See
Note 2 for discussion of the impact of adoption of ASC 842 on January 1, 2019, and below for the ROU assets and liabilities recorded
in connection with the adoption of ASC 842 as of, and during the nine months ended September 30, 2019 for the Alameda Lease.
In
addition to base rent, Lineage will pay a pro rata portion of increases in certain expenses, including real property taxes, utilities
(to the extent not separately metered to the leased space) and the landlord’s operating expenses, over the amounts of those
expenses incurred by the landlord. As security for the performance of its obligations under the Alameda Lease, Lineage provided
the landlord with a security deposit of approximately $424,000, which was reduced to $78,000 on January 24, 2019 in accordance
with the terms of the lease. The security deposit amount is considered restricted cash and $78,000 is included in deposits and
other long-term assets as of September 30, 2019 (see Note 2).
Carlsbad
Lease
In
May 2019, Lineage entered into a lease for approximately 8,841 square feet of rentable space in an office park in Carlsbad, California
(the “Carlsbad Lease”). The term of the Carlsbad Lease commenced on August 1, 2019 and expires on October 31, 2022.
Base
rent under the Carlsbad Lease beginning on August 1, 2019 is $17,850 per month and will increase by 3% annually on every August
1 thereafter during the lease term. Base rent for the first twenty-four months of the lease is based upon a deemed rentable area
of 7,000 square feet. Base rent is abated for months two through five of the lease.
In
addition to base rent, Lineage will pay a pro rata portion of increases in certain expenses, including real property taxes, utilities
(to the extent not separately metered to the leased space) and the landlord’s operating expenses, over the amounts of those
expenses incurred by the landlord. As security for the performance of its obligations under the Carlsbad Lease, Lineage provided
the landlord with a security deposit of approximately $17,850.
New
York Leased Office Space
Lineage
currently pays $5,050 per month for the use of approximately 900 square feet of office space in New York City, which is made available
to Lineage for use in conducting meetings and other business affairs, on a month-by-month basis, by one of its directors at an
amount that approximates his cost. This lease was not in the scope of ASC 842 because it is a month to month lease (see Note 2).
Cell
Cure Lease
Cell
Cure leases 728.5 square meters (approximately 7,842 square feet) of office and laboratory space in Jerusalem, Israel under a
lease that expires December 31, 2020, with two options to extend the lease for 5 years each. Base monthly rent is NIS 37,882 (approximately
US $11,000 per month using the December 31, 2018 exchange rate). In addition to base rent, Cell Cure pays a pro rata share of
real property taxes and certain costs related to the operation and maintenance of the building in which the leased premises are
located.
On
January 28, 2018, Cell Cure entered into another lease agreement for an additional 934 square meters (approximately 10,054 square
feet) of office space in the same facility in Jerusalem, Israel under a lease that expires on December 31, 2025, with two options
to extend the lease for 5 years each (the “January 2018 Lease”). The January 2018 Lease commenced on April 1, 2018
and included a leasehold improvement construction allowance of up to NIS 4,000,000 (approximately up to $1.1 million using the
December 31, 2018 exchange rate) from the landlord. The leasehold improvements were completed in December 2018 and the entire
allowance was used. Beginning on January 1, 2019, combined base rent and construction allowance payments for the January 2018
Lease are NIS 93,827 per month (approximately $26,000 per month).
Prior
to the adoption of ASC 842 on January 1, 2019, Cell Cure was considered the owner of the tenant improvements under construction
under ASC 840-40-55 as Cell Cure, among other things, had the primary obligation to pay for construction costs and Cell Cure retains
exclusive use of the leased facilities for its office, research and cGMP manufacturing facility requirements after construction
was completed (“build to suit” lease). In accordance with the ASC 840 guidance, amounts expended by Cell Cure for
construction was reported as construction in progress, and the proceeds received from the landlord, if any, are reported as a
lease liability. As of December 31, 2018, approximately $1.1 million under the January 2018 Lease was incurred and recorded as
leasehold improvement construction in progress (see Note 7), with a corresponding amount included in long term lease liability
representing the full amount utilized from the landlord’s leasehold improvement construction allowance. By March 2019, the
landlord paid the complete leasehold improvement construction allowance and the property was placed in service.
See
Note 2 for discussion of the impact of adoption of ASC 842 on January 1, 2019, and below for the ROU assets and liabilities recorded
in connection with the adoption of ASC 842 as of, and during the nine months ended September 30, 2019 for the Cell Cure and January
2018 Leases above (the “Cell Cure Leases”).
In
December 2018, Cell Cure made a $388,000 deposit required under the January 2018 Lease, which amount is included in deposits and
other long-term assets on the consolidated balance sheet as of December 31, 2018, to be held as restricted cash during the term
of the January 2018 Lease.
Adoption
of ASC 842
The
below tables provide the amounts recorded in connection with the adoption of ASC 842 as of, and during the nine months ended September
30, 2019, for Lineage’s operating and financing leases, as applicable.
Supplemental
cash flow information related to leases was as follows (in thousands):
|
|
Nine Months Ended
September 30, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
1,026
|
|
Operating cash flows from financing leases
|
|
|
24
|
|
Financing cash flows from financing leases
|
|
|
20
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
|
|
Operating leases
|
|
|
89
|
|
Financing leases
|
|
|
-
|
|
Supplemental
balance sheet information related to leases was as follows (in thousands, except lease term and discount rate):
|
|
September 30, 2019
|
|
Operating leases
|
|
|
|
|
Right-of-use assets, net
|
|
$
|
4,950
|
|
|
|
|
|
|
Right-of-use lease liabilities, current
|
|
|
1,105
|
|
Right-of-use lease liabilities, noncurrent
|
|
|
4,088
|
|
Total operating lease liabilities
|
|
$
|
5,193
|
|
|
|
|
|
|
Financing leases
|
|
|
|
|
Property and equipment, gross
|
|
$
|
146
|
|
Accumulated depreciation
|
|
|
(42
|
)
|
Property and equipment, net
|
|
$
|
104
|
|
|
|
|
|
|
Current liabilities
|
|
|
33
|
|
Long-term liabilities
|
|
|
87
|
|
Total finance lease liabilities
|
|
$
|
120
|
|
|
|
|
|
|
Weighted average remaining lease term
|
|
|
|
|
Operating leases
|
|
|
4.3
years
|
|
Finance leases
|
|
|
3.7 years
|
|
Weighted average discount rate
|
|
|
|
|
Operating leases
|
|
|
9.1
|
%
|
Finance leases
|
|
|
10.0
|
%
|
Future
minimum lease commitments are as follows (in thousands):
|
|
Operating Leases
|
|
|
Finance
Leases
|
|
Year Ending December 31,
|
|
|
|
|
|
|
|
|
2019
|
|
$
|
339
|
|
|
$
|
11
|
|
2020
|
|
|
1,589
|
|
|
|
43
|
|
2021
|
|
|
1,528
|
|
|
|
36
|
|
2022
|
|
|
1,508
|
|
|
|
36
|
|
2023
|
|
|
397
|
|
|
|
15
|
|
Thereafter
|
|
|
1,015
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total lease payments
|
|
$
|
6,376
|
|
|
$
|
141
|
|
Less imputed interest
|
|
|
(1,183
|
)
|
|
|
(21
|
)
|
Total
|
|
$
|
5,193
|
|
|
$
|
120
|
|
Research
and Option Agreement
On
January 5, 2019, Lineage and Orbit Biomedical Limited (“Orbit”) entered into a Research and Option Agreement (the
“Orbit Agreement”) for an exclusive partnership to assess Orbit’s vitrectomy-free subretinal injection device
as a means of delivering OpRegen in Lineage’s ongoing Phase I/IIa clinical trial. The term of the Orbit Agreement is for
one year unless certain research activities and related data specified in the Orbit Agreement is obtained sooner. The access fees
payable by Lineage to Orbit for its technology and the injection device are $2.5 million in the aggregate, of which $1.25 million
was paid in January 2019 upon execution of the Orbit Agreement and the remaining $1.25 million payment which was due on
the earlier of (i) six months from the Orbit Agreement date or, (ii) upon completion of certain collaborative research activities
using the Orbit technology for the OpRegen Phase I/IIa clinical trial, as specified in the Orbit Agreement. In addition to the
access fees, Lineage reimburses Orbit for costs of consumables, training services, travel costs and other out of pocket
expenses incurred by Orbit for performing services under the Orbit Agreement. Lineage has exclusive rights to the Orbit technology
and its injection device for the treatment of dry-AMD during the term of the Orbit Agreement and may extend the term for an additional
three months by paying Orbit a cash fee of $500,000. In July 2019, Lineage completed the collaborative research activities referred
to above and the second $1.25 million payment was made in August 2019. For the three and nine months ended September 30, 2019,
Lineage amortized $0.6 million and $1.9 million of the Orbit fees included in research and development expenses.
Litigation
Lineage
is subject to various claims and contingencies in the ordinary course of its business, including those related to litigation,
business transactions, employee-related matters, and others. When Lineage is aware of a claim or potential claim, it assesses
the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably
estimated, Lineage will record a liability for the loss. If the loss is not probable or the amount of the loss cannot be reasonably
estimated, Lineage will disclose the claim if the likelihood of a potential loss is reasonably possible and the amount involved
could be material. Lineage is not aware of any claims likely to have a material adverse effect on its financial condition or results
of operations.
On
February 19, 2019, a putative shareholder class action lawsuit was filed (captioned Lampe v. Asterias Biotherapeutics, Inc.
et al., Case No. RG19007391) in the Superior Court of the State of California, County of Alameda challenging the Asterias
Merger. On March 1, 2019, Asterias made certain amendments and supplements to its public disclosures regarding the Asterias Merger
(the “Supplemental Disclosures”). On May 3, 2019, an amended class action complaint (the “Amended Complaint”)
was filed. The Amended Complaint named Lineage, Patrick Merger Sub, Inc., the Asterias board of directors, one member of Lineage’s
board of directors, and certain stockholders of both Lineage and Asterias. The action was brought by two purported stockholders
of Asterias, on behalf of a putative class of Asterias stockholders, and asserted breach of fiduciary duty and aiding and abetting
claims under Delaware law. The Amended Complaint alleged, among other things, that the process leading up to the Asterias Merger
was conflicted and inadequate, and that the proxy statement filed by Asterias with the Commission omitted certain material information,
which allegedly rendered the information disclosed materially misleading. The Amended Complaint sought, among other things, that
a class be certified, the recovery of monetary damages, and attorneys’ fees and costs.
On
June 3, 2019, defendants filed demurrers to the Amended Complaint. On August 13, 2019, the parties submitted a stipulation to
the court seeking dismissal of the action with prejudice as to the named Plaintiffs and without prejudice as to the unnamed putative
class members, and disclosing to the court the parties’ agreement to resolve, for $200,000, Plaintiffs’ claim for
an award of attorneys’ fees and expenses in connection with the purported benefit conferred on Asterias stockholders by
the Supplemental Disclosures. The court granted the stipulation and dismissed the action August 14, 2019. Lineage continues to
believe that the claims and allegations in the action lack merit, but believed that it was in Lineage’s shareholders’
best interest for the action to be dismissed and to resolve the fee claim in a timely manner without additional costly litigation
expenses.
On
October 14, 2019, another putative class action lawsuit was filed challenging the Asterias Merger. This action (captioned Ross
v. Lineage Cell Therapeutics, Inc., et al., C.A. No. 2019-0822) was filed in Delaware Chancery Court and names Lineage, the
Asterias board of directors, one member of Lineage’s board of directors, and certain stockholders of both Lineage and Asterias
as defendants. The action was brought by a purported stockholder of Asterias, on behalf of a putative class of Asterias stockholders,
and asserts breach of fiduciary duty and aiding and abetting claims under Delaware law. The complaint alleges, among other things,
that the process leading up to the Asterias Merger was conflicted, that the Asterias Merger consideration was inadequate, and
that the proxy statement filed by Asterias with the Commission omitted certain material information, which allegedly rendered
the information disclosed materially misleading. The complaint seeks, among other things, that a class be certified, the recovery
of monetary damages, and attorneys’ fees and costs.
Lineage
believes the allegations in the action lack merit and intends to vigorously defend the claims asserted. It is impossible at this
time to assess whether the outcome of this proceeding will have a material adverse effect on Lineage’s consolidated results
of operations, cash flows or financial position. Therefore, in accordance with ASC 450, Contingencies, Lineage has not
recorded any accrual for a contingent liability associated with this legal proceeding based on its belief that a liability, while
possible, is not probable nor estimable, and any range of potential contingent liability amounts cannot be reasonably estimated
at this time. Lineage records legal expenses as incurred.
Employment
contracts
Lineage
has entered into employment agreements with certain executive officers. Under the provisions of the agreements, Lineage may be
required to incur severance obligations for matters relating to changes in control, as defined in the agreements, and involuntary
terminations.
Indemnification
In
the normal course of business, Lineage may provide indemnifications of varying scope under Lineage’s agreements with other
companies or consultants, typically Lineage’s clinical research organizations, investigators, clinical sites, suppliers
and others. Pursuant to these agreements, Lineage will generally agree to indemnify, hold harmless, and reimburse the indemnified
parties for losses and expenses suffered or incurred by the indemnified parties arising from claims of third parties in connection
with the use or testing of Lineage’s products and services. Indemnification provisions could also cover third party infringement
claims with respect to patent rights, copyrights, or other intellectual property pertaining to Lineage products and services.
The term of these indemnification agreements will generally continue in effect after the termination or expiration of the particular
research, development, services, or license agreement to which they relate. The potential future payments Lineage could be required
to make under these indemnification agreements will generally not be subject to any specified maximum amount. Historically, Lineage
has not been subject to any claims or demands for indemnification. Lineage also maintains various liability insurance policies
that provide Lineage with insurance against claims or demands for indemnification in specified circumstances. As a result, Lineage
believes the fair value of these indemnification agreements is minimal. Accordingly, Lineage has not recorded any liabilities
for these agreements as of September 30, 2019 and December 31, 2018.
Royalty
obligations and license fees
Lineage
and its subsidiaries or affiliates are parties to certain licensing agreements with research institutions, universities and other
parties for the rights to use those licenses and other intellectual property in conducting research and development activities.
These licensing agreements provide for the payment of royalties by Lineage or the applicable party to the agreement on future
product sales, if any. In addition, in order to maintain these licenses and other rights during the product development, Lineage
or the applicable party to the contract must comply with various conditions including the payment of patent related costs and
annual minimum maintenance fees. Annual minimum maintenance fees are approximately $135,000 to $150,000 per year. The research
and development risk for these products is significant. License fees and related expenses under these agreements were immaterial
for the periods presented in the condensed consolidated interim financial statements provided herein.
Grants
Under
the terms of the grant agreement between Cell Cure and Israel Innovation Authority (“IIA”) (formerly the Office of
the Chief Scientist of Israel) of the Ministry of Economy and Industry, for the development of OpRegen, Cell Cure will be required
to pay royalties on future product sales, if any, up to the amounts received from the IIA, plus interest indexed to LIBOR. Cell
Cure’s research and product development activities under the grant are subject to substantial risks and uncertainties and
performed on a best efforts basis. As a result, Cell Cure is not required to make any payments under the grant agreement unless
it successfully commercializes OpRegen. Accordingly, pursuant to ASC 730-20, the grant is considered a contract to perform research
and development services for others and grant revenue is recognized as the related research and development expenses are incurred
(see Note 2).
Israeli
law pertaining to such government grants contain various conditions, including substantial penalties and restrictions on the transfer
of intellectual property, or the manufacture, or both, of products developed under the grant outside of Israel, as defined by
the IIA.
16.
Subsequent Events
On
October 14, 2019, a putative shareholder class action lawsuit was filed (captioned Ross v. Lineage Cell Therapeutics, Inc.,
et al. C.A. No. 2019-0822) in Delaware Chancery Court. See Note 15.
On
November 10, 2019, Lineage sold 400,000 HBL shares for net proceeds of $0.5 million. After the transaction, Lineage holds 495,317
HBL shares.