1. Organization, Basis of Presentation and Liquidity

Lineage Cell Therapeutics, Inc. (“Lineage,” “we,” “us,” or “our”) is a clinical-stage biotechnology company developing novel cell therapies to address unmet medical needs. Our programs are based on our proprietary cell-based technology and associated development and manufacturing capabilities. From this platform, we design, develop, and manufacture specialized human cells with anatomical and physiological functions which are similar or identical to cells found naturally in the human body. These cells which we manufacture are created by developmental differentiation protocols applied to established and well-characterized, pluripotent, and self-renewing cell lines. These functional cells are transplanted into patients to either replace or support cells that are dysfunctional or absent due to degenerative disease or traumatic injury, or are administered as a means of helping the body mount a more robust and effective immune response to cancer or infectious diseases.

Our strategy is to efficiently leverage our technology platform and manufacturing capabilities to develop and advance our programs internally or in conjunction with strategic partners to further enhance their value. As one example, on December 17, 2021, we entered into a Collaboration and License Agreement with F. Hoffmann-La Roche Ltd and Genentech, Inc., a member of the Roche Group (collectively, “Roche”), wherein Lineage granted to Roche exclusive worldwide rights to develop and commercialize retinal pigment epithelium cell therapies, including its proprietary cell therapy known as OpRegen®, for the treatment of ocular disorders, including advanced dry age-related macular degeneration with geographic atrophy. Roche has paid Lineage a $50.0 million upfront payment under this alliance and Lineage is eligible to receive up to an additional $620.0 million in certain developmental, regulatory, and commercialization milestone payments. Lineage also is eligible for tiered double-digit percentage royalties on net sales of OpRegen.

Currently, Lineage is working with Roche in support of the dry age-related macular degeneration (OpRegen) program and is clinically testing therapies to treat spinal cord injuries and non-small cell lung cancer, as well as conducting research and preclinical development activities intended to advance our pipeline into other therapeutic indications and target tissues or organs.

Product Candidates & Other Programs

We have several allogeneic, or “off-the-shelf,” cell therapy programs in development:

In addition to seeking to create value for shareholders by developing product candidates and other technologies through our clinical development programs, we also seek to create value from our technologies through partnering and strategic transactions. We founded two companies that later became publicly traded companies: OncoCyte Corporation (“OncoCyte”) and AgeX Therapeutics, Inc. (“AgeX”). We continue to hold common stock in OncoCyte as of December 31, 2021.

During the year ended December 31, 2021, we received approximately $10.1 million in gross proceeds in connection with our sale of shares of OncoCyte. In August 2020, we also received $24.6 million from Juvenescence Limited (“Juvenescence”), representing principal and accrued interest under a promissory note we received in connection with our sale of AgeX shares to Juvenescence in August 2018.

Asterias Merger

On November 7, 2018, Lineage, Asterias Biotherapeutics, Inc. (“Asterias”) and Patrick Merger Sub, Inc., a wholly owned subsidiary of Lineage, entered into an Agreement and Plan of Merger (the “Merger Agreement”) whereby Lineage agreed to acquire all of the outstanding common stock of Asterias in a stock-for-stock transaction (the “Asterias Merger”).

On March 7, 2019, the shareholders of each of Lineage and Asterias approved the Merger Agreement. Prior to the Asterias Merger, Lineage owned approximately 38% of Asterias’ issued and outstanding common stock and accounted for Asterias as an equity method investment.

On March 8, 2019, the Asterias Merger closed with Asterias surviving as a wholly owned subsidiary of Lineage. The former stockholders of Asterias (other than Lineage) received 0.71 common shares of Lineage for every share of Asterias common stock they owned. Lineage issued 24,695,898 common shares, including 58,085 shares issued in respect of restricted stock units issued by Asterias that immediately vested in connection with the closing of the Asterias Merger. The aggregate dollar value of such shares, based on the closing price of Lineage common shares on March 8, 2019, was $32.4 million. The total purchase price was $52.6 million. Lineage also assumed warrants to purchase shares of Asterias common stock.

The Asterias Merger was 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.

Use of estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period with consideration given to materiality. Significant estimates and assumptions which are subject to significant judgment include those related to going concern assessment of consolidated financial statements, useful lives associated with long-lived assets, including evaluation of asset impairment, allowances for uncollectible accounts receivables, loss contingencies, deferred income taxes and tax reserves, including valuation allowances related to deferred income taxes, and assumptions used to value stock-based awards, debt or other equity instruments. Actual results could differ materially from those estimates.

Principles of consolidation

Lineage’s consolidated financial statements include the accounts of its subsidiaries. The following table reflects Lineage’s ownership, directly or through one or more subsidiaries, of the outstanding shares of its operating subsidiaries as of December 31, 2021.

All material intercompany accounts and transactions have been eliminated in consolidation. As of December 31, 2021, 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

Lineage has incurred significant operating losses and in recent years has funded its operations primarily through sale of common stock of AgeX and OncoCyte, both former subsidiaries, sale of common stock of Hadasit Bio-Holdings Ltd (“HBL”), receipt of research grants, royalties from product sales, license revenues, sales of research products and issuance of equity securities.

On May 1, 2020, Lineage entered into a Controlled Equity Offering^SM 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 (“ATM Shares”) having an aggregate offering price of up to $25.0 million. Lineage is not obligated to sell any ATM Shares. 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 ATM 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 ATM 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 ATM Shares are subject to satisfaction of certain conditions, including the continued effectiveness of Lineage’s Registration Statement on Form S-3 (File No. 333-237975), which was filed with the Commission on May 1, 2020 and was declared effective on May 8, 2020. The Sales Agreement replaced the previous sales agreement with Cantor that had been entered into in April 2017.

On March 5, 2021, Lineage filed a prospectus supplement with the SEC in connection with the offer and sale of an additional $25.0 million of common shares under the Sales Agreement increasing the total offering to $50.0 million. As of December 21, 2021, $14.1 million remained available for sale under the Sales Agreement. On December 21, 2021, Lineage filed a prospectus supplement with the SEC in connection with the offering and sale of up to $64.1 million of common shares (the “New Sales Agreement”), with Cantor Fitzgerald as the sales agent, no additional sales will be made under the Sales Agreement. The $64.1 million under the New Sales Agreement which may be issued are registered pursuant to Lineage’s effective shelf registration on Form S-3 (File No. 333-237975), as filed with the SEC on May 1, 2020 and declared effective on May 8, 2020 (the “May 2020 Registration Statement”), and Lineage’s effective shelf registration statement on Form S-3 (File No. 333-254167), which was filed with the SEC on March 5, 2021 and declared effective on March 19, 2021. As of December 31, 2021, under the Sales Agreement, Lineage had issued 14,908,735 common shares at a weighted average price per share of $2.41 for gross proceeds of $35.9 million. As of December 31, 2021, under the New Sales Agreement, Lineage had issued 108,200 common shares at a weighted average price per share of $2.55 for gross proceeds of $0.3 million (which includes $0.2 million of cash in transit related to a 2021 transaction that settled in early 2022). As a result, as of December 31, 2021, $ 63.9 million remained available for sale under the New Sales Agreement.

As of December 31, 2021, Lineage had an accumulated deficit of approximately $337.1 million, working capital of $64.4 million and shareholders’ equity of $90.9 million. Lineage has evaluated its projected cash flows and believes that its $58.4 million of cash, cash equivalents and marketable equity securities are sufficient to fund Lineage’s planned operations for at least the next twelve months from the issuance date of the 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.

In January 2022, Lineage received a $50.0 million upfront payment related to the Roche Agreement. Lineage made a subsequent payment of $12.1 million to the IIA, pursuant to Lineage’s obligations under the Innovation Law. Additionally, Lineage made a subsequent payment of $8.9 million to Hadasit, pursuant to Lineage’s obligations under the Second Amended and Restated License Agreement. See Note 14 for a description of the Roche Agreement and related payment obligations.

Lineage’s projected cash flows are subject to various risks and uncertainties, and the unavailability or inadequacy of financing to meet future capital needs could force Lineage to modify, curtail, delay, or suspend some or all aspects of its planned operations. Lineage’s determination as to when it will seek new financing and the amount of financing that it will need will be based on Lineage’s evaluation of the progress it makes in its research and development programs, any changes to the scope and focus of those programs, any changes in grant funding for certain of those programs, and projection of future costs, revenues, and rates of expenditure. Lineage’s ability to raise additional funds may be adversely impacted by deteriorating global economic conditions and the disruptions to and volatility in the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic. Lineage may be required to delay, postpone, or cancel clinical trials or limit the number of clinical trial sites, unless it is able to obtain adequate financing. 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.