Lineage Cell Therapeutics, Inc.: Form 10-K for the period ended Dec 31, 2022

Overview

Lineage is a clinical-stage biotechnology company developing novel cell therapies to address unmet medical needs. Our programs are based on our proprietary cell-based technology platform and associated development and manufacturing capabilities. From this platform, we design, develop, manufacture, and test specialized human cells with anatomical and physiological functions similar to, or identical to, cells found naturally in the human body. Cells which we manufacture are created by specific developmental biological differentiation protocols that we apply to established, well-characterized, and self-renewing pluripotent cell lines. These cells are transplanted into patients and are designed to (a) replace or support cells that are absent or dysfunctional due to degenerative disease, aging, or traumatic injury, and (b) restore or augment functional activity in the affected person.

Our strategy is to efficiently leverage our technology platform and our development, formulation, delivery, and manufacturing capabilities to advance our programs internally, or in conjunction with strategic partners, to further enhance their value and probability of success. As one example, in December 2021 we entered into a Collaboration and License Agreement (the “Roche Agreement”) with F. Hoffmann-La Roche Ltd and Genentech, Inc., a member of the Roche Group (collectively or individually, “Roche” or “Genentech”), wherein we granted to Roche exclusive worldwide rights to develop and commercialize retinal pigment epithelium (“RPE”) cell therapies, including our proprietary cell therapy program known as OpRegen®, for the treatment of ocular disorders, including geographic atrophy (GA) secondary to age-related macular degeneration (AMD). Under the terms of the Roche Agreement, Lineage received a $50.0 million upfront payment and is eligible to receive up to $620.0 million in certain developmental, regulatory, and commercialization milestone payments. Lineage also is eligible to receive tiered double-digit percentage royalties on net sales of OpRegen in the U.S. and other major markets. See Note 14 (Commitments and Contingencies) to our consolidated financial statements included elsewhere in this Report for discussion on the Roche Agreement.

As of December 31, 2022, we have five allogeneic, or “off-the-shelf,” cell therapy programs in development, of which three have reached clinical testing:

Product Candidates

• OpRegen®, an allogeneic retinal pigment epithelium cell replacement therapy currently in a Phase 2a multicenter clinical trial, being conducted by Genentech, for the treatment of geographic atrophy (GA) secondary to age-related macular degeneration (AMD), also known as atrophic or dry AMD. A previous Phase 1/2a trial conducted by Lineage enrolled twenty-four (24) individuals with dry AMD with GA. In December 2021, this program was partnered with Roche for further clinical development and commercialization.
• OPC1, an allogeneic oligodendrocyte progenitor cell therapy currently in long-term follow-up from a Phase 1/2a multicenter clinical trial for cervical spinal cord injuries (“SCI”). To date, five (5) patients with thoracic spinal cord injuries and twenty-five (25) patients with cervical spinal cord injuries have been enrolled in clinical trials of OPC1. The clinical development of OPC1 has been partially funded by $14.3 million received under a grant from the California Institute for Regenerative Medicine (“CIRM”). Additional clinical trials are being planned.
• VAC, an allogeneic cancer immunotherapy comprised of antigen-presenting dendritic cells. One of the VAC product candidates, VAC2, is currently in a Phase 1 clinical trial in non-small cell lung cancer (“NSCLC”). This clinical trial is being funded and conducted by Cancer Research UK, one of the world’s largest independent cancer research charities. An additional VAC-based product candidate is in preclinical development with our partner, Immunomic Therapeutics, Inc. (“ITI”), for the treatment of glioblastoma multiforme (“GBM”).
• ANP1, an allogeneic auditory neuron progenitor cell transplant currently in preclinical development for the treatment of debilitating hearing loss (“DHL”).
• PNC1, an allogeneic photoreceptor cell transplant currently in preclinical development for the treatment of vision loss due to photoreceptor dysfunction or damage.

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Other Programs

We have additional undisclosed product candidates being considered for development, which cover a range of therapeutic areas and unmet medical needs. Generally, these product candidates are based on the same platform technology and employ a similar guided cell differentiation and transplant approach as the product candidates detailed above, but in some cases may also include genetic modifications designed to enhance efficacy and/or safety profiles.

In addition to seeking to create value for shareholders by developing product candidates and advancing those candidates through clinical development, we also may seek to create value from our large patent estate and additional related technologies and capabilities, through partnering and/or strategic transactions.

2022 Development Highlights

We achieved numerous strategic and operational accomplishments during 2022, including advancing our clinical programs and product development in several key programs.

• Continued execution under our collaboration with Roche and Genentech for the development of RG6501 (OpRegen) across multiple functional areas.
• The expansion of our clinical pipeline to include a new auditory neuronal cell transplant program (ANP1) for the treatment of hearing loss.
• The expansion of our clinical pipeline to include a new cell therapy development program, photoreceptor neural cell (PNC1) transplants for the treatment of vision loss due to photoreceptor dysfunction.
• Data were presented at the Association for Research in Vision and Ophthalmology annual meeting (ARVO), suggesting that OpRegen continues to be well tolerated with an acceptable safety profile, coupled with visual function and outer retinal structure improvements in patients with GA and impaired vision.
• Reported that our partner, Cancer Research UK, had completed patient enrollment in a Phase 1 clinical study of VAC2 for the treatment of non-small cell lung cancer.

Business Strategy

Our goal is to address unmet medical needs by developing and advancing allogeneic, or “off-the-shelf,” treatments comprised of functional cells delivered to the body. Our biological therapies are derived from the differentiation of pluripotent stem cells from established and self-renewing cell lines. We direct these pluripotent cells to become specific cell types, or combinations of cell types, and use those differentiated cells as treatments to restore diseased or diminished functions, such as impaired vision, loss of movement, sensation, and hearing, or to increase immune response to tumors or infectious agents.

To support the furtherance of our product candidates, we aim to generate or have generated in vitro and in vivo data to support human testing where such testing is warranted. In some cases, we may collaborate with strategic partners, external advisors, or consultants to support the development of our cell therapy technology.

One area of focus is our continued effort to support our partner, Genentech, with the production and testing of our lead product candidate, OpRegen (RG6501), which currently is being evaluated in a 30-60 patient Phase 2a multicenter, open-label, single arm clinical study, as well as in the follow-up portion of a 24-patient Phase 1/2a multicenter, open-label, clinical study, in patients with dry age-related macular degeneration (dry AMD).

We also aim to advance our clinical-stage product candidate, OPC1, for the treatment of spinal cord injury, into a clinical study to evaluate the safety and performance of a novel cell delivery system to deliver oligodendrocyte progenitor cells to the spinal parenchyma.

Our clinical stage dendritic cell product candidate, VAC2, is the subject of a Phase 1 clinical trial conducted by our partner, Cancer Research UK, which has completed enrollment of eight (8) patients with advanced non-small cell lung cancer and we anticipate receiving additional data from that trial during this year.

Our preclinical product candidates, ANP1 for hearing loss and our photoreceptor program, PNC1, to address various forms of blindness, will continue to be evaluated in preclinical testing to determine the suitability of each program to advance into initial human testing.

We have identified, and we may seek to develop, additional product candidates based on our cell replacement approach. We may elect to conduct these activities on our own or through various collaborative arrangements. Such additional product candidates could include gene edits, which may provide enhanced functionality or offer more attractive safety or commercial profiles. We may utilize various types of pluripotent cell lines as starting material for our product candidates. Presently, our process development and manufacturing activities, including our cGMP production of clinical trial material, are predominantly conducted at our facility located in Jerusalem Israel, but such work may be supplemented or complemented by our additional facility located in Carlsbad, California.

Cell Therapy Technology Platform

We believe we are a leader in pluripotent, cell-based asset development based on directed differentiation protocols of cellular lineages and cell manufacturing capabilities. Pluripotent cells, which are widely published as capable of becoming any human cell type, have potential applications in many areas of medicine with large unmet patient needs, including certain age-related degenerative diseases, degenerative conditions, or traumatic injury. We are currently in clinical development for various pluripotent cell-derived product candidates such as RPE cells, oligodendrocyte progenitor cells, and dendritic cells and preclinical development for auditory neurons and photoreceptor cells. In addition, we are considering the differentiation of pluripotent cells into additional cell types that may have therapeutic benefits in other areas of unmet medical need.

Cellular therapies are often aimed at regenerating or replacing affected cells or tissues and therefore may have more durable, broader, or more suitable applicability than certain traditional pharmaceutical products which seek to influence a single molecular target or group of biological pathways. Small molecules and biologic therapies that require systemic delivery into the body often have unexpected side effects that can limit their usefulness. When cell replacement is locally administered to a specific anatomical compartment, systemic side effects are usually well-tolerated. Lineage’s cell therapy approach resembles transplant medicine, as it is focused on whether transplanted cells are retained or rejected by the body and whether the transplanted cells function as expected.

A key advantage of our approach is that it can provide us the opportunity to rapidly develop new programs without the extensive and costly steps traditionally required to develop a small molecule agonist or antagonist. Whereas small molecule product development typically requires selection and validation of a drug target, followed by screening millions of molecules (e.g., a “library” of compounds) to identify hits, followed by chemical modification guided by structure-activity relationship or “SAR” to develop a hit into a more potent lead, the process of developing a new cell therapy from pluripotent lines can be comparatively faster because the target cell type is already known to be “validated”, insofar as it is well-established in the literature as being the cell type which is dysfunctional or deficient in the patient. The most challenging step in developing a new cell therapy is the establishment of a controllable and reproducible differentiation protocol which can create the quality of cells to support clinical testing and commercial supply, a process which avoids mass screening campaigns and is more readily accomplished via the combination of literature reviews and in-house experience with pluripotent cell differentiation. This approach can facilitate pipeline expansion at a lower cost than traditional methods (Figure 1).

Figure 1. Lineage’s Internal cGMP Facility Capabilities

In addition to our corporate headquarters located in Carlsbad, California, we recently opened a new research and development (R&D) facility also located in Carlsbad, expanding the Company’s R&D capabilities in the U.S. and supporting the development of current and future allogeneic cell transplant programs. We also have a modern and innovative manufacturing facility in the Bio Park on the campus of the Hadassah University Hospital in Jerusalem, Israel. The facility includes process development laboratories and a state-of-the-art, current good manufacturing practice (“cGMP”) cell manufacturing facility. It is designed and equipped to run simultaneous cGMP processes and to produce a range of cell therapy products for human use in clinical trials as well as improve scalability for potential commercialization. Currently, all of our cGMP manufacturing processes, including cell banking and product manufacturing for our cell therapy product candidates, are conducted in this facility (Figure 2).

Figure 2. Novel Clinical Cell Therapy Pipeline

OpRegen®

OpRegen is a retinal pigment epithelial cell therapy in Phase 2a development for the treatment of geographic atrophy secondary to age-related macular degeneration. Following subretinal delivery, OpRegen has the potential to counteract RPE cell loss in areas of GA lesions by supporting retinal structure and function. OpRegen is being developed under a worldwide collaboration between Lineage, Roche and Genentech, a member of the Roche Group. See Note 14 (Commitments and Contingencies) to our consolidated financial statements included elsewhere in this Report for discussion on the Roche Agreement.

OpRegen has been granted Fast Track Designation from the U.S. FDA, which includes an expedited regulatory path with the ability for increased interfacing with the FDA during the clinical development process.

AMD is a gradual, progressive, deterioration of the macula, the small sensitive area in the center of the retina that provides clear, high-definition central vision. It is a leading cause of vision loss in people over the age of 65 in the developed world. According to a 2022 report in JAMA Ophthalmology, 18.34 million individuals in the U.S. 40 years and older (11.64%) were living with early-stage AMD and 1.49 million (0.94%) were living with late-stage AMD in 2019. As the area of atrophy begins to include the fovea (the center of the macula), patients may lose their central vision, making facial recognition, reading, and driving difficult or impossible, and may ultimately become legally blind. The exact cause of GA secondary to AMD is unknown, but is thought to result from multiple factors, such as genetics, age, smoking history, and environmental effects. There are two clinical presentations of AMD, the dry form, and the wet, or neovascular form (growth of abnormal new blood vessels). Dry AMD typically advances slowly toward GA as RPE cells and photoreceptors become dysfunctional and deteriorate over time. RPE cells support and nourish the retina by metabolizing waste by-products and producing a number of components essential for photoreceptor health and function. If the metabolic waste products accumulate, lesions known as drusen may result. Approximately 85-90% of AMD patients suffer from the dry form of AMD, for which there is only one FDA approved therapeutic option at this time. Additionally, dry AMD may also lead to wet AMD, a condition for which there are several FDA-approved treatments administered locally to inhibit the growth of new blood vessels. Physicians often recommend a healthy diet, exercise and/or nutritional supplements for dry AMD, but nutritional supplements have shown limited efficacy in delaying the onset of more progressive disease in longer-term studies. The schematics in Figures 3 and 4 show a representation of the process of drusen formation and the goal of cell replacement therapy.

Figure 3. Dry AMD involves the loss of retina cells, creating an area of geographic atrophy (GA), which causes impaired vision and blindness Figure 4. OpRegen is an injection of RPE cells delivered to the retina, to replace lost retinal cells and preserve or restore vision

We believe one of the most promising approaches to treat GA secondary to dry AMD is to replace the layer of damaged RPE cells with new, healthy, and functional RPE cells manufactured from a well-characterized, allogeneic cell line, transplanted to the subretinal space around the atrophic area (GA). OpRegen is a cell replacement therapy derived from our pluripotent cell technology in which our proprietary directed-differentiation methods convert pluripotent stem cells into nearly pure populations of RPE cells. Using this method, OpRegen is grown free of any animal products and consists of human RPE cells with high yield and purity that can be transplanted directly into the patient’s eye, where the patient’s own RPE cells are missing or dysfunctional. The OpRegen therapeutic approach is designed to replace damaged or lost RPE cells with the goal of slowing disease progression to preserve and/or restore visual function.

OpRegen is intended to be an allogeneic, or “off-the-shelf,” product provided to retinal surgeons in an “easy-to-use” form for transplantation. We believe OpRegen could have a lasting benefit from a single administration, or may be administered every several years. This approach differs from other investigational agents, as well as for the single approved drug for treatment of GA secondary to AMD, pegcetacoplan injection (SYFOVRE®), and approved agents currently marketed for wet AMD, such as ranibizumab (Lucentis®) and aflibercept (Eylea®). All of these approaches require repeated, frequent (monthly or every-other-month) intravitreal injections into the eye.

In a Phase 1/2a clinical trial, OpRegen has demonstrated the potential to slow, stop or reverse disease progression in geographic atrophy secondary to AMD. This is an open-label, single-arm, multi-center, dose-escalation trial evaluating a single administration of OpRegen delivered subretinally in patients with bilateral GA. Patient enrollment completed in November 2020, with twenty-four patients recruited into four cohorts. The first three cohorts enrolled only legally blind patients with a best corrected visual acuity (BCVA) of 20/200 or worse. The fourth cohort enrolled 12 patients with impaired vision (BCVA from 20/65 to 20/250 with smaller mean areas of GA). Cohort 4 also included patients treated with a new “thaw-and-inject” formulation of OpRegen, which could be shipped directly to sites and used immediately upon thawing. The primary objective of the study was to evaluate the safety and tolerability of OpRegen as assessed by the incidence and frequency of treatment-emergent adverse events. Secondary objectives evaluated the preliminary activity of OpRegen treatment by assessing the changes in ophthalmological parameters measured by various methods of primary clinical relevance. Long-term follow-up of patients in this study is currently ongoing.

Results from the primary endpoint, the safety and tolerability at one year post-OpRegen transplant, were presented at the 2022 Association for Research in Vision and Ophthalmology Annual Meeting (ARVO 2022), and suggest that OpRegen RPE cells are generally well-tolerated with an acceptable safety profile. Importantly, no unexpected ocular adverse events (AEs) were observed and those events that were observed were considered expected based on the surgical procedures involved in OpRegen administration, such as vitrectomy. Most AEs reported (cohorts 1-3, 87%; cohort 4, 93%) were mild in severity.

Findings on clinical examination by different imaging modalities have shown positive clinical benefits in some patients as evidenced by retinal structure improvement and decreases in drusen, as well as durable engraftment of OpRegen cells now extending to more than five years in the earliest treated patients. Across the study, a trend toward slower GA progression in treated compared to untreated eyes continues to be present. Of note, five subjects from cohort 4 where the OpRegen suspension was delivered to most or all of the GA area, including the fovea, have shown evidence of outer retinal structural improvement (tissue restoration). This was accompanied by a reduction in the overall size, or no growth in the area of atrophy, at least 12 months post-treatment and the presence of key retinal cells that were not observable at baseline study entry. This anatomical effect was accompanied by improvements in visual acuity in most cohort 4 treated patients (average gain of 7.6 letters read), but particularly the five patients with better surgical coverage (average 12.8 letter gain). Furthermore, differences in visual acuity between treated and untreated eyes remained statistically significant across Cohort 4 patients at 15 months post-treatment. These unprecedented findings support the view that dry AMD is not an irreversible, degenerative condition and that some portion of diseased retinal tissue may be recoverable in atrophic end-stage disease patients.

In December 2021, we entered into the Roche Agreement for the development and commercialization of OpRegen. See “—Collaborations—Roche Collaboration Agreement,” below.

In November 2022, we announced our partner Genentech, a member of the Roche group has launched a Phase 2a, multicenter, open-label, single arm clinical study of RG6501 (OpRegen), a retinal pigment epithelial cell therapy. The study is intended to optimize subretinal surgical delivery and evaluate the safety and activity of OpRegen in approximately 30, and up to 60, patients with geographic atrophy (GA) secondary to age-related macular degeneration. The primary objectives of the study are to evaluate (i) the proportion of patients with subretinal surgical delivery of OpRegen to target regions under the retina, and (ii) to evaluate the safety of subretinal surgical delivery of OpRegen as measured by the incidence and severity of procedure-related adverse events at 3 months following surgery. A key secondary objective is to evaluate the proportion of patients with qualitative improvement in retinal structure, as determined by Optical Coherence Tomography (SD-OCT) imaging, within 3 months following surgery. RG6501 (OpRegen) is currently being developed under an exclusive worldwide collaboration between Lineage, Roche and Genentech.

OPC1

OPC1 is an oligodendrocyte progenitor cell therapy in Phase 1/2a development for the treatment of acute SCI. SCI occurs when the spinal cord is subjected to a severe crush or contusion injury, such as that caused by a car or motorcycle accident, and typically results in severe functional impairment, including limb paralysis, aberrant pain signaling, and/or loss of bladder and sexual function. There are approximately 18,000 new spinal cord injuries annually in the U.S. (NSCIC SCI Facts and Figures at a Glance (2019)), and there are currently no FDA-approved drugs specifically for the treatment of SCI, although methylprednisolone, a corticosteroid generally used as an anti-inflammatory drug, is sometimes prescribed on an off-label basis to reduce acute inflammation in the injured spinal cord immediately after injury. Approaches to treat this complex injury may include multiple mechanisms of action, such as biologics that preserve surviving neurons and stimulate new nerve axon outgrowth, suppression of lesion cavity formation at the injury site, generation of new blood vessels to repair the ischemic damage from injury, and myelination of the demyelinated and newly formed nerve axons. A promising therapeutic target in SCI is replacement of oligodendrocytes that are selectively lost at the injury site. As the sole source of the insulating protein myelin in the brain and spinal cord, oligodendrocytes wrap around nerve axons and allow the conduction of electrical impulses throughout the central nervous system (“CNS”), as shown in Figure 5.

Figure 5. Oligodendrocytes are the myelinating cells of the CNS and are critical for nerve signal conduction

OPC1 is derived from our pluripotent cell technology under cGMP conditions using a directed differentiation method. These cells are stored frozen until ready for use and prepared for direct administration into the injured spinal cord. Based on preclinical studies, when OPC1 is transplanted into the injured spinal cord, the cells undergo further maturation to generate a replacement population of oligodendrocytes at the injury site that are capable of remyelinating denuded and newly formed nerve axons. Based on preclinical studies, prior to their maturation, the transplanted oligodendrocyte progenitor cells are believed to stimulate additional reparative processes, including promotion of neuron survival and nerve axon outgrowth, and induction of blood vessel formation in and around the injury site. In addition, OPC1 cells rapidly migrate from the injection point to the injury site where they generate a supportive tissue matrix and suppress cavitation. Cavitation is a destructive process that occurs within the spinal cord following SCI, and typically results in permanent loss of motor and sensory function. A patient with cavitation can develop a condition known as syringomyelia, which results in additional neurological and functional damage to the patient and can result in chronic pain (Figure 6). Based on the multiple reparative properties associated with OPC1, we believe this candidate cell therapy product is ideally suited to treat neurological conditions such as SCI and other demyelination disorders of the CNS.

Figure 6. Suppression of spinal cavitation in a rat contusion model

The development of OPC1 has been supported by a $14.3 million clinical development grant from CIRM. We intend to apply for additional grants from CIRM for the program’s continued development. See “—Grants from Government Entities,” below.

Before our acquisition of Asterias Biotherapeutics, Inc. (“Asterias”), Asterias was testing OPC1 in two clinical trials: a five-patient Phase 1 safety trial in acute thoracic SCI and a 25-patient Phase 1/2a dose escalation trial in subacute cervical SCI, called the SCiStar trial. The SCiStar trial was an open-label, single-arm trial that tested three sequential escalating doses of OPC1 administered at up to 20 million OPC1 cells with subacute, C-4 to C-7, motor complete (AIS-A or AIS-B) cervical SCI. OPC1 was administered 21 to 42 days post-injury. Patients were followed by neurological exams and imaging procedures to assess the safety and activity of the product. Key findings for both the thoracic and cervical studies are shown in Figure 7.

Figure 7. OPC1 Thoracic & Cervical Clinical Trials Overview

The FDA designated OPC1 as a Regenerative Medicine Advanced Therapy (“RMAT”), for the treatment of subacute SCI. RMAT is an accelerated development pathway and includes the ability for increased interfacing with the FDA during clinical development. The FDA has also granted OPC1 Orphan Drug Designation, providing a pathway to possible market exclusivity.

In 2019, we transferred all cGMP manufacturing processes, including the establishment of cell banks and the OPC1 process development and manufacturing for clinical studies, to our cell therapy manufacturing facility in Jerusalem, Israel. Improvements to the manufacturing process were performed to create enhancements to the production process and scale and to achieve greater purity of OPC1. We also developed a thaw and inject formulation of OPC1 to facilitate logistics and handling at the point of care with the elimination of the dose preparation at the clinical site. Throughout 2021, we manufactured clinical batches based on the improved process in a thaw and inject formulation in preparation for a larger-scale, late-stage clinical trial.

In February 2021, we announced an exclusive agreement with Neurgain Technologies, Inc. (“Neurgain”), to evaluate a novel delivery system for OPC1. Preliminary assessment of prototypes revealed promising compatibility with OPC1 product while simplifying the surgical procedure by providing surgeons with an instrument that is small, simple to use, and would not require stopping the patient’s ventilator to perform the injection, allowing for flexibility with accurate delivery to the injury site. We continued to evaluate the Neurgain device throughout 2021 and 2022. We have submitted an RMAT package to the FDA to support the use of a new delivery device, along with a protocol synopsis for a small safety study in both subacute and chronic patients. We intend to submit an IND amendment during 2023 for a human safety clinical study to validate the device (DOSED – Delivery of Oligodendrocyte Progenitor Cells for Spinal Cord Injury: Evaluation of a Novel Device) and an additional submission to support the use of the device in a late-stage clinical study to follow.

We are actively working both on expanding our existing and establishing new collaborative partnerships with SCI patient engagement and advocacy organizations, with the overarching goals of enhancing awareness of SCI and elevating the patient’s voice in the treatment development process.

VAC Platform

VAC is our immuno-oncology platform using dendritic cells loaded with antigens for the treatment of cancer. Cancer afflicts millions worldwide and represents one of the largest unmet clinical needs with current treatment options providing limited efficacy and a wide range of potentially debilitating side effects. As the most potent type of antigen-presenting cell in the body, dendritic cells instruct the human body’s immune system to attack and eliminate harmful pathogens and unwanted cells, including cancer cells.

To provide a more targeted treatment for non-small cell lung cancer (NSCLC), we are currently developing VAC2 as an allogeneic, or non-patient specific, cancer vaccine designed to stimulate patient immune responses to an antigen, human telomerase reverse transcriptase (hTERT), which is commonly expressed in cancerous cells but is not usually found in normal adult cells. VAC2 is produced by our pluripotent cell technology using a directed differentiation method and is comprised of a population of mature dendritic cells to which the hTERT antigen was introduced via an mRNA construct which is loaded into the dendritic cell via electroporation. The VAC1 autologous program, which preceded VAC2 but relied on the same antigen, served as proof of concept behind our approach to utilize dendritic cell vaccines targeting telomerase to treat cancer.

Using pluripotent cells as the starting material for VAC production offers certain advantages. Compared to technologies that rely on the use of a patient’s own blood, our pluripotent cell technology provides a path to a more scalable system for the production of a large number of vaccine doses, lower manufacturing costs, greater product consistency, and off-the-shelf availability. In addition, we believe that as an allogeneic therapy, VAC has the potential to stimulate a more robust immune response through an adjuvant effect resulting from the partial immune mismatch between the VAC cells and patients receiving the therapy. We believe that VAC can be used as a platform technology that can be modified to carry a diverse number or type of antigen, including patient-specific tumor neo-antigens.

In September 2014, Asterias initiated clinical development of VAC2 by entering into a Clinical Trial and Option Agreement (the “CRUK Agreement”) with Cancer Research UK (“CRUK”) and Cancer Research Technology Limited (“CRT”), a wholly owned subsidiary of CRUK, under which CRUK agreed to fund Phase 1 clinical development of VAC2 in NSCLC. CRUK was responsible, at its own cost, for manufacturing clinical grade VAC2 and for carrying out the Phase 1 clinical trial of VAC2. In April 2022, we announced that CRUK had completed patient enrollment in the ongoing Phase 1 clinical trial of VAC2 for the treatment of NSCLC. All eight patients completed dosing in the initial aspect of the trial and CRUK is currently conducting analyses of various samples collected per protocol.

As previously reported, VAC2 demonstrated potent and specific induction of immune response in all patients dosed and analyzed to date, with high levels of peripheral antigen-specific immunogenicity observed at multiple time points. Importantly, VAC2 appeared to be well tolerated with no unexpected adverse events (AEs) and no dose-limiting toxicity, serious adverse events (SAEs) or AEs.

We completed the transfer of all cGMP manufacturing processes, including the establishment of cell banks and the VAC2 process development and manufacturing for clinical studies, to our cell therapy manufacturing facility in Jerusalem, Israel.

In April 2021, Lineage entered into a worldwide license and development collaboration agreement with ITI. See “—Collaborations—ITI Collaboration Agreement,” below.

Throughout 2022, we focused on improving the manufacturing process for VAC to provide a reliable supply for potential future clinical studies and commercial development. We submitted a pre-IND package to the FDA in the third quarter of 2022 and have received important feedback that will help guide any future full IND submission(s). We also continue to evaluate additional opportunities for the introduction of new VAC candidates based on internally identified or partnered tumor antigens to expand the VAC platform.

Auditory Neurons

The Auditory Neurons program was established in 2022 with the goal of advancing auditory neuron transplant therapy as a treatment option for hearing loss conditions. The initial focus of this program is on the treatment of auditory neuropathy spectrum disorders (ANSD), a group of conditions characterized by the loss of auditory neuron function where the sound is not transmitted properly from the cochlea (inner ear) to the brain. Based on our proprietary technology platform, we have developed a unique differentiation process for generating auditory neurons (ANP1), which are planned to undergo preclinical testing this year to assess their safety and delivery system. In February 2023, we reported that preclinical testing of ANP1 had begun through a collaboration with the University of Michigan and Yehoash Raphael, Ph.D., The R. Jamison and Betty Williams Professor of Otolaryngology, Department of Otolaryngology-Head and Neck Surgery and Lab Director at the University of Michigan Kresge Hearing Research Institute.

Photoreceptors

The Photoreceptor program is developing the process of directing the differentiation of human pluripotent cells into clinical-grade transplantable photoreceptor precursors/cells (PRCs) and to show their further differentiation, integration, and function after transplantation into the subretinal space of animal models of photoreceptor degeneration. Photoreceptor degeneration is the hallmark of a variety of retinal diseases such as retinitis pigmentosa (RP). Currently, the only approved treatments are gene therapies which treat specific genetic defects that lead to RP. Our PNC1 program is aimed to replace damaged photoreceptors regardless of the origin of degeneration. We hope to be able to present top-line preclinical data once the appropriate intellectual property submissions have been made and as data become available.

Collaborations

To accelerate the discovery and advancement of transplanting specific cell types into the body, we have entered into, and intend to seek additional opportunities to form collaborations with a diverse group of strategic partners. We have entered collaborations with pharmaceutical and biotechnology companies, government agencies, academic laboratories, and research institutes with resources and expertise in diverse areas in an effort to advance our discovery and development platforms and will continue to evaluate such collaborations.

One key principle of our approach to collaborations is to share rewards and risks of conducting large-scale clinical trials and commercializing a product, but also to provide the broadest patient population with the earliest access to our therapies.

Roche Collaboration Agreement

On December 17, 2021, Lineage entered into the Roche Agreement, pursuant to which Lineage granted to Roche exclusive worldwide rights to develop and commercialize retinal pigment epithelium cell therapies, including its proprietary cell therapy known as OpRegen, for the treatment of ocular disorders, including advanced dry AMD with GA.

Under the terms of the Roche Agreement, Roche will assume responsibility for further clinical development and commercialization of OpRegen, Lineage will be responsible for completing activities related to the ongoing clinical study Phase 1/2a open-label, dose-escalation clinical safety and efficacy study in patients with advanced dry AMD with GA, for which enrollment is complete, and performing certain manufacturing and process development activities.

Roche paid Lineage a $50.0 million upfront payment (which was received in January 2022) and Lineage is eligible to receive up to an additional $620.0 million in certain developmental, regulatory and commercialization milestone payments. Lineage is also eligible for tiered double-digit percentage royalties on net sales of OpRegen. All milestone payments, and royalty payments, due under the Roche Agreement are subject to the existence of certain intellectual property rights that cover OpRegen at the time such payments would otherwise become due, and the royalties on net sales of OpRegen are subject to financial offsets based on the existence of competing products.

Unless earlier terminated by either party, the Roche Agreement will expire on a product-by-product and country-by-country basis upon the expiration of all of Roche’s payment obligations under the Roche Agreement. Roche may terminate the Roche Agreement in its entirety, or on a product-by-product or country-by-country basis, at any time with advanced written notice. Either party may terminate the Roche Agreement in its entirety with written notice for the other party’s material breach if such party fails to cure the breach. Either party also may terminate the Roche Agreement in its entirety upon certain insolvency events involving the other party.

Lineage is obligated to pay to the IIA (as defined below) approximately 24.3% of the upfront payment and of any future payments Lineage receives under the Roche Agreement, up to an aggregate cap on all payments to IIA, such cap growing over time via interest accrual until paid in full, which currently stands at approximately $91.2 million. In addition, pursuant to the Second Amended and Restated License Agreement, dated June 15, 2017, between our foreign subsidiary located in Jerusalem, Israel, Cell Cure Neurosciences Ltd. (“Cell Cure”), and Hadasit Medical Research and Development Ltd. (“Hadasit”), as amended, and a letter agreement entered into between Cell Cure and Hadasit on December 17, 2021, Cell Cure is obligated to pay to Hadasit (i) a maximum of 21.5% of the upfront payment (subject to certain reductions) and of any milestone payments Lineage receives from Roche under the Roche Agreement, and (ii) up to 50% of all royalty payments (subject to a maximum payment of 5% of net sales of products) Lineage receives from Roche under the Roche Agreement. In accordance with the foregoing obligations, from the $50.0 million upfront payment Lineage received from Roche in January 2022, Lineage paid $12.1 million to the IIA and $8.9 million to Hadasit. See “—Grants from Government Entities,” below, and Note 14 (Commitments and Contingencies) to our consolidated financial statements included in this report for additional information related to our obligations to the IIA and Hadasit.

ITI Collaboration Agreement

On April 16, 2021, Lineage entered a worldwide license and development collaboration with ITI (the “ITI Agreement”). Lineage is the sole and exclusive owner of the rights to the VAC platform and has licensed to ITI patents and materials for the development and commercialization of a novel cancer immunotherapy agent derived from this platform utilizing an antigen provided by ITI.

Under terms of the ITI Agreement, Lineage is entitled to initial fees totaling up to $2.0 million, which we have received $1.0 million , and up to an additional $67.0 million in development and commercial milestones across multiple indications. Lineage will also be eligible to receive royalties of up to 10% on net sales of future products. ITI has received a research and development grade of the VAC-CMV product and is evaluating its next steps.

Grants from Government Entities

Grants from the Israeli Innovation Authority

Under the Israeli Encouragement of Research, Development and Industrial Initiative Technology Law, 5744-1984, as amended, and related regulations (collectively, the “Innovation Law”), research and development programs which meet specified criteria and are approved by the Israel Innovation Authority (the “IIA”) are eligible for grants of up to 50% of the project’s expenditure, as determined by the research committee, in exchange for the payment of royalties from the revenues generated from the sale of product candidates and related services developed, in whole or in part pursuant to, or as a result of, a research and development program funded by the IIA. The royalties are generally at a range of 3.0% to 5.0% of revenues until the entire IIA grant is repaid, together with an annual interest generally tied to an interest rate index.

Under the Innovation Law, the manufacture of product candidates developed with government grants is required to be performed in Israel. The transfer of manufacturing activity outside Israel may be subject to the prior approval of the IIA, and if approved, may increase the royalties payable to the IIA, in certain cases substantially. The amount of the increase in the royalties payable depends on the percentage of manufacturing activity that occurs outside Israel.

The know-how developed within the framework of the Innovation Law plan may not be transferred to third parties outside Israel without the prior approval of a governmental committee chartered under the Innovation Law. The IIA approval to transfer know-how created, in whole or in part, in connection with an IIA-funded project to a third party outside Israel where the transferring company remains an operating Israeli entity is subject to payment of a redemption fee to the IIA calculated according to a formula provided under the Innovation Law that is based, in general, on the ratio between the aggregate IIA grants to the company’s aggregate investments in the project that was funded by these IIA grants, multiplied by the transaction consideration. The transfer of such know-how to a party outside Israel where the transferring company ceases to exist as an Israeli entity is subject to a redemption fee formula that is based, in general, on the ratio between the aggregate IIA grants to the total financial investments in the company, multiplied by the transaction consideration. The redemption fee in case of transfer of know-how to a party outside Israel is generally based on the ratio between the aggregate IIA grants received by the company and the company’s aggregate research and development expenses. The fee is multiplied by the transaction consideration, and the maximum amount payable to the IIA in case of transfer of know-how outside Israel will not exceed six times the value of the grants received plus interest. In the event that the receiver of the grants ceases to be an Israeli corporation such payment shall not exceed six times the value of the grants received plus interest, with a possibility to reduce such payment to up to three times the value of the grants received plus interest if the research and development activity remains in Israel for a period of three years after payment to the IIA.

The restrictions under the Innovation Law, including restrictions on the sale, transfer or licensing to a non-Israeli entity of know-how developed as part of the programs under which the grants were given, continue to apply even after the repayment of royalties in full by the grant recipient.

Part of Cell Cure’s research and development efforts have been financed, partially, through grants that it has received from the IIA and when we acquired our holdings in Cell Cure, we undertook in writing, vis-à-vis the IIA, to comply with, and to ensure the compliance by Cell Cure with, the Innovation Law. We therefore must comply with the requirements of the Innovation Law and related regulations. To date, through a series of separate grants beginning in 2007, Cell Cure received a total of $15.4 million from the IIA to support the OpRegen program. See Note 14 (Commitments and Contingencies) to our consolidated financial statements included in this report for additional information.

Grants from the California Institute for Regenerative Medicine

The clinical development of OPC1 has been supported by $14.3 million of grants from CIRM, a state agency established to fund stem cell research and development of new stem cell-based treatments. The terms of our grant award from CIRM require royalty payments to the California State General Fund based on net commercial revenue from the sale of any product, drug or service arising from CIRM-funded research as follows: 0.1% per $1.0 million of funds granted for the earlier of 10 years or nine times the award amount that has been paid. In addition, a 1% royalty will be owed on net commercial revenue in excess of $500 million per year until the last to expire patent covering a CIRM-funded invention, if any, contributed towards the commercialization of the product.

Other Programs

We may elect to develop additional product candidates currently in the earliest stages of development and which cover a range of therapeutic areas. Generally, these product candidates are still conceptual but are based on the same pluripotent platform technology and would employ a similar guided cell differentiation and transplant approach as our current clinical-stage products.

Patents and Trade Secrets

We seek to protect and rely on our proprietary cell-based therapy platform and associated development and manufacturing capabilities and derived product candidates through a variety of methods, including seeking and maintaining patents intended to cover our products and compositions, their methods of use and processes for their manufacture, our platform technologies and any other inventions that are commercially important to the development of our business. We also rely on contractual obligations with employees and third parties to protect our proprietary rights. For example, in addition to protecting our proprietary rights with patents, we rely on unpatented trade secrets, improvements, know-how and innovation, and we take steps necessary to protect these rights, including through confidentiality agreements with our corporate partners, employees, consultants and vendors. We have sought, and intend to continue to seek, appropriate patent protection for important and strategic components of our proprietary technologies by filing patent applications in the United States and internationally. We may also file additional patent applications, when appropriate, to cover improvements on our clinical products, clinical product candidates, and related technologies. There are no assurances that any of our intellectual property rights will guarantee complete or adequate protection or market exclusivity for our products and product candidates. We also enter into collaborative and other similar arrangements with third parties, such as license agreements, to in-license and/or out-license intellectual property rights. Our financial success will be dependent, in part, on our ability to obtain rights to commercially valuable patents, to protect and enforce our intellectual property rights and to operate without infringing any intellectual property rights of others. From time to time, we assess our patents and pending applications covering our products and product candidates. If we determine that any patents or patent applications no longer provide adequate or necessary protection, we may transfer or abandon such patents and patent applications to avoid incurring unnecessary costs.

We own or license, directly or through our subsidiaries, patent families that include several hundreds of U.S. and international patents and patent applications. We cannot be certain that issued patents will be enforceable or provide adequate protection or that pending applications will result in issued patents.

OpRegen®

We have rights to issued U.S. and international patents and pending patent applications covering OpRegen. The issued patents have expiration dates ranging from 2028 to 2036. The pending applications, if issued, will have estimated expiration dates ranging from 2028 to 2042. These U.S. and international issued patents and pending applications also include those in-licensed from Hadasit, a wholly owned subsidiary of Hadassah Medical Organization. We also solely own pending U.S. and international patent applications relating to a cryopreserved thaw-and-inject formulation. The U.S. patent applications, and any filed international patent applications based on the PCT applications, if issued, will have estimated expiration dates in 2038. Pursuant to the Roche Agreement, we have licensed these patent rights to Roche to further develop and commercialize RPE cell therapies, including OpRegen (see “—Collaborations—Roche Collaboration Agreement” above).

OPC1

We have numerous U.S. and international issued patents and pending patent applications that are relevant to neural cells, such as oligodendrocyte progenitor cells, including patent families acquired from Geron Corporation (“Geron”) that are directed to the differentiation of pluripotent stem cells, including human embryonic stem (“hES”) cells, into various neural cell types, as well as various culture and purification methods. Additionally, there are four patent families with pending patent applications owned by us directed to improved methods of producing oligodendrocyte progenitor cells, oligodendrocyte progenitor cell compositions, and methods of treatment of spinal cord injury using oligodendrocyte progenitor cells. The estimated expiration dates of the four patent families with pending applications owned by us range from 2036 to 2043. The commercial success of OPC1 depends, in part, upon our ability to exclude competition for this product with the existing patent portfolio, regulatory exclusivity, undisclosed know-how and/or trade secrets, or a combination of these barriers to entry.

VAC Platform

We have numerous U.S. and international issued patents and pending patent applications that are relevant to dendritic cells, including patent families acquired from Geron or in-licensed from third parties that are directed to the differentiation of pluripotent stem cells, including hES cells, into hematopoietic progenitor cells and immature and mature dendritic cells. In addition, these patent rights include a patent family with claims directed to immunogenic compositions comprising antigen-presenting dendritic cells and methods of eliciting an anti-telomerase immune response in a subject by administering to the subject such compositions. The expiration dates of the patents, and the estimated expiration dates of the pending applications, acquired from Geron or in-licensed to us range from 2022 to 2029. We also solely own pending U.S. and international patent applications relating to VAC and VAC processes with estimated expiration dates, if issued, from 2041 to 2043. The commercial success of VAC products depends, in part, upon our ability to exclude competition in these products with this patent portfolio, regulatory exclusivity, undisclosed know-how and/or trade secrets, or a combination of these barriers to entry.

Auditory Neurons

We have a pending U.S. provisional patent application for our ANP1 program. It is anticipated that this provisional patent application will be converted to a U.S. utility patent application and one or more international patent applications in 2023 and, if issued, would have estimated patent expiration dates of 2043.

Photoreceptors

We have pending U.S. and international patent applications for our PNC1 program. These pending patent applications include a patent family licensed from Hadasit and a patent family solely owned by Lineage. The pending patent applications licensed from Hadasit, if issued, would have estimated patent expiration dates of 2038. The pending patent applications owned by Lineage, if issued, would have estimated patent expiration dates of 2036. We also have a pending U.S. provisional patent application jointly owned with Hadasit. It is anticipated that this provisional patent application will be converted to a U.S. utility patent application and one or more international applications in 2023 and, if issued, would have estimated patent expiration dates of 2043.

General Risks Related to Obtaining and Enforcing Patent Protection

Because patent applications are confidential until a patent application is published or a patent is issued, we may not know if our competitors have filed patent applications for technology covered by our pending applications or if we were the first to invent or first to file an application directed toward the technology that is the subject of our patent applications. Competitors may have filed patent applications or received patents and may obtain additional patents and proprietary rights that block or compete with our products. In addition, if competitors file patent applications covering our technology, we may have to participate in interference/derivation proceedings or litigation to determine the right to a patent. Litigation and interference/derivation proceedings are unpredictable and expensive, such that, even if we are ultimately successful, our results of operations may be adversely affected by such events. Accordingly, there is a risk that any patent applications that we file and any patents that we hold or later obtain could be challenged by third parties and be declared invalid in view of third-party patent applications and/or patents. Litigation, interferences, oppositions, inter partes’ reviews or other proceedings are, have been and may in the future be necessary in some instances to determine the validity and scope of certain of our proprietary rights, and in other instances to determine the validity, scope or non-infringement of certain patent rights claimed by third parties to be pertinent to the manufacture, use or sale of our products. We may also face challenges to our patent and regulatory protections covering our products by third parties, including manufacturers of generics and biosimilars that may choose to launch or attempt to launch their products before the expiration of our patent or regulatory exclusivity. Litigation, interference, oppositions, inter partes’ reviews, administrative challenges or other similar types of proceedings are unpredictable and may be protracted, expensive and distracting to management. The outcome of such proceedings could adversely affect the validity and scope of our patent or other proprietary rights, hinder our ability to manufacture and market our products, require us to seek a license for the infringed product or technology or result in the assessment of significant monetary damages against us that may exceed any amounts that we may accrue on our financial statements as a reserve for contingent liabilities. An adverse determination in a judicial or administrative proceeding or a failure to obtain necessary licenses could prevent us from manufacturing or selling our products. Furthermore, payments under any licenses that we are able to obtain would reduce our profits derived from the covered products and services.

The enforcement of patent rights often requires litigation against third-party infringers, and such litigation can be costly to pursue. Even if we succeed in having new patents issued or in defending any challenge to issued patents, there is no assurance that our patents will be comprehensive enough to provide us with meaningful patent protection against our competitors.

Employees

As of December 31, 2022, we had 78 employees, of which 25 were employed by Lineage and 53 were employed by Cell Cure and work in Israel. Of the 78 employees, 70 were employed on a full-time basis and eight were employed on a part-time basis. Eleven employees hold Ph.D. degrees in one or more fields of science or doctorates in medicine. None of our employees are covered by a collective bargaining agreement.

Manufacturing

Manufacturing of pluripotent-derived products is complex and requires the use of innovative technologies to handle living cells. Manufacturing these products requires facilities specifically designed for and validated for this purpose and specific quality assurance and quality control procedures are necessary. Currently, all of our cGMP manufacturing processes, including cell banking and product manufacturing for our cell therapy product candidates, are conducted at our facility in Jerusalem, Israel. The facility, which includes process development laboratories and a cGMP manufacturing facility, is designed and equipped to enable simultaneous cGMP processes and to produce a range of cell therapy products for human use in clinical trials as well as at a scale suitable for commercial launch.

Our process development and manufacturing are designed to address the complexity of manufacturing cell-based therapies with a specific focus on the reproducibility and scale of the manufacturing process. To this end each of our manufacturing processes contains predefined steps that are controlled by a specific set of control tests that allow us to follow up the progression of production according to the manufacturing plan, We implement a variety of 2-dimensional and 3-dimensional culture conditions to address the specific requirements of our pre-defined differentiation processes of the pluripotent cell into a functional cell product.

We obtain key components required for the manufacture of our cell therapy product candidates from third-party manufacturers and suppliers, which include, in some instances, sole source manufacturers and suppliers. We do not currently have long-term commitments or supply agreements in place to obtain certain key components used in the manufacture of our cell therapy product candidates.

Licensed Technology and Product Development Agreements

Lineage has obtained the right to use various technologies that we believe have great potential in our product development efforts, and that may be useful to other companies that are engaged in the research and development of products for human therapeutic and diagnostic use.

Second Amendment to Clinical Trial and Option Agreement and License Agreement with Cancer Research UK

In March 2020, Lineage and its wholly owned subsidiary Asterias entered into a Second Amendment to Clinical Trial and Option Agreement (the “CTOA Amendment”) with CRUK and CRT, which amends the Clinical Trial and Option Agreement entered into between Asterias, CRUK and CRT dated September 8, 2014, as amended September 8, 2014. Pursuant to the CTOA Amendment, Lineage assumed all obligations of Asterias and exercised early its option to acquire data generated in the Phase 1 clinical trial of VAC2 in non-small cell lung cancer being conducted by CRUK.

Either party may terminate the CRT License Agreement for the uncured material breach of the other party. CRT may terminate the CRT License Agreement in the case of Lineage’s insolvency or if Lineage ceases all development and commercialization of all products under the CRT License Agreement.

WARF Agreements

We have rights to certain U.S and international issued patents, pending patent applications, and stem cell lines with the Wisconsin Alumni Research Foundation (“WARF”) under a Commercial License and Option Agreement entered into between Lineage and WARF in January 2008 and a Non-Exclusive License Agreement entered into between Asterias and WARF in October 2013 (collectively, the “WARF Agreements”).

Under the WARF Agreements, we have a worldwide non-exclusive license under certain WARF patents and WARF-owned primate (including human) stem cell lines covered by such patents for use in internal research, and to make, use and sell products that are used as research tools and products that are discovered or developed through our internal research using such patents and stem cells. We paid upfront license fees and have agreed to additional payments upon the attainment of specified clinical development milestones, royalties on sales of commercialized products, and, subject to certain exclusions, a percentage of any payments that we may receive from any sublicenses that we may grant to use the licensed patents or stem cell lines.

The WARF Agreements will terminate with respect to licensed patents upon the expiration of the last licensed patent to expire and with respect to licensed cell lines until terminated by a party. We may terminate the WARF Agreements at any time with prior written notice, and WARF may terminate the WARF Agreements upon a breach. We have agreed to indemnify WARF and certain other designated affiliated entities from liability arising out of or relating to the death or injury of any person or damage to property due to the sale, marketing, use or manufacture of products that are covered by the licensed patents, licensed stem cell lines or inventions or materials developed or derived from the licensed patents or stem cell lines.

Royalty Agreement with Geron

In connection with Asterias’s acquisition of Geron’s stem cell assets in October 2013, we entered into a royalty agreement with Geron (the “Royalty Agreement”) pursuant to which we agreed to pay Geron a 4% royalty on net sales by us or any of our affiliates or sales agents of any products that we develop and commercialize that are covered by the patents Geron contributed to us. In the case of sales of such products by a person other than us or one of our affiliates or sales agents, we will be required to pay Geron 50% of all royalties and cash payments received by us or by our affiliate in respect of a product sale. The Royalty Agreement will terminate at the expiration or termination date of the last issued patent contributed by Geron under the Royalty Agreement. We estimate that the latest patent expiration date will be in 2029.

Government Regulation

Government authorities at the federal, state and local level, and in other countries, extensively regulate among other things, the development, testing, manufacture, quality, approval, safety, efficacy, distribution, labeling, packaging, storage, record keeping, marketing, import/export and promotion of drugs, biologics, and medical devices. Authorities also heavily regulate many of these activities for human cells, tissues, and cellular and tissue-based products (“HCT/Ps”).

FDA and Foreign Regulation of Therapeutic Products

The FDA and foreign regulatory authorities will regulate our proposed products as drugs, biologics or medical devices, depending upon such factors as the use to which the product will be put, the chemical composition, and the interaction of the product with the human body. In the United States, the FDA regulates drugs, biologics and medical devices, among other things, under the Federal Food, Drug and Cosmetic Act (“FDCA”), the Public Health Service Act (“PHSA”), and implementing regulations. In addition, establishments that manufacture human cells, tissues, and cellular and tissue-based products (“HCT/Ps”) are subject to additional regulations, including registration and listing requirements and current good tissue practices. Certain proposed cell therapy products will be reviewed by the FDA staff in its Center for Biologics Evaluation and Research Office of Therapeutic Products (“OTP”).

Our domestic human drug and biologic products will be subject to rigorous FDA review and approval procedures. After testing in animals to evaluate the potential efficacy and safety of the product candidate, an IND submission must be made to the FDA to obtain authorization for human testing. Extensive clinical testing, which is generally done in three phases, must then be undertaken to demonstrate optimal use, safety, and efficacy of each product in humans. Each clinical trial is conducted under the auspices of an independent Institutional Review Board (“IRB”). The IRB will consider, among other things, ethical factors, the safety of human subjects, and the possible liability of the institution.

Phase 1 clinical trials are conducted in a small number of healthy volunteers or volunteers with the target disease or condition to assess safety and dosage. Phase 2 clinical trials are conducted with groups of patients afflicted with the target disease or condition in order to determine preliminary efficacy, optimal dosages and expanded evidence of safety. In some cases, an initial trial is conducted in diseased patients to assess both preliminary safety and preliminary efficacy, in which case it is referred to as a Phase 1/2 clinical trial. Phase 3 clinical trials are large-scale, multi-center, comparative trials and are conducted with patients afflicted with the target disease or condition in order to provide enough data to demonstrate the efficacy and safety required by the FDA. The FDA closely monitors the progress of each of the three phases of clinical testing and may, at its discretion, re-evaluate, alter, suspend or terminate the clinical trial based upon the data which have been accumulated to that point and its assessment of the risk/benefit ratio to the intended patient population. The clinical trial sponsor is required to report adverse events to the FDA and IRB in accordance with FDA laws and regulations. Monitoring of all aspects of the trial to minimize risks is a continuing process.

No action can be taken to market any therapeutic product in the U.S. until an appropriate New Drug Application (“NDA”) or Biologics License Application (“BLA”) has been approved by the FDA. Submission of the application is not a guarantee that the FDA will find it complete and accept it for filing. If an application is accepted for filing, following the FDA’s review, the FDA may grant marketing approval, or deny the application by way of a complete response letter if it determines that the application does not provide an adequate basis for approval. FDA regulations also restrict the export of therapeutic products for clinical use prior to FDA approval. Before approving an NDA or BLA, the FDA will inspect the facilities at which the product is manufactured or perform an establishment file review of the site. The FDA will not approve the product unless it determines that the manufacturing processes and facilities are in compliance with the requirements of current Good Manufacturing Practices (“cGMP”) and adequate to assure consistent production of the product within required specifications including good tissue practices (“GTPs”) to the extent applicable. GMPs are FDA regulations that detail minimum requirements for the methods, facilities, and controls used in manufacturing, processing, and packing of a drug product. GTPs are FDA regulations and guidance documents that govern the methods used in, and the facilities and controls used for, the manufacture of HCT/Ps. The primary intent of the GTP requirements is to ensure that cell and tissue-based products are manufactured in a manner designed to prevent the introduction, transmission and spread of communicable disease. FDA regulations also require HCT/P establishments to register and list their HCT/Ps with the FDA and, when applicable, to evaluate donors through screening and testing. To maintain compliance with cGMPs, GTPs, and GCPs, an applicant must incur significant expenditure of time, money and effort in the areas of training, record keeping, production, and quality control.

To date, the FDA has not granted marketing approval to any pluripotent stem cell-based therapeutic products, and it is possible that the FDA or foreign regulatory agencies may subject our product candidates to additional or more stringent review than drugs or biologics derived from other technologies.

The FDA offers several programs to expedite development of products that treat serious or life-threatening illnesses and that provide meaningful therapeutic benefits to patients over existing treatments. A drug is eligible for designation as an RMAT if: the drug is a regenerative medicine therapy, which is defined as a cell therapy, therapeutic tissue engineering product, human cell and tissue product or any combination product using such therapies or products, except for those regulated solely under Section 361 of the Public Health Service Act; the drug is intended to treat, modify, reverse or cure a serious or life-threatening disease or condition; and preliminary clinical evidence indicates that the drug has the potential to address unmet medical needs for such disease or condition.

Under the Orphan Drug Act, the FDA may grant orphan designation to a drug or biologic intended to treat a rare disease or condition, which is a disease or condition that affects fewer than 200,000 individuals in the United States, or if it affects more than 200,000 individuals in the United States, there is no reasonable expectation that the cost of developing and making available a drug or biologic for this type of disease or condition will be recovered from sales in the United States for that drug or biologic. Orphan drug designation is a separate process from seeking an NDA or BLA. After the FDA grants orphan drug designation, the generic identity of the therapeutic agent and its potential orphan use are disclosed publicly by the FDA. The orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review or approval process.

If a product that has orphan drug designation subsequently receives the first FDA approval for the disease for which it has such designation, the product may be entitled to orphan drug exclusivity, which means that the FDA may not approve any other applications, including a full NDA or BLA, to market the same drug biologic for the same indication for seven years, except in limited circumstances, such as a showing of clinical superiority to the product with orphan drug exclusivity. Orphan drug exclusivity does not prevent FDA from approving a different drug or biologic for the same disease or condition, or the same drug or biologic for a different disease or condition. Among the other benefits of orphan drug designation are tax credits for certain research and a waiver of the NDA or BLA application fee. A designated orphan drug may not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation. In addition, exclusive marketing rights in the United States may be lost if the FDA later determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantities of the product to meet the needs of patients with the rare disease or condition.

Combination Products

Combination products are defined by the FDA to include products comprised of two or more regulated components or parts such as a biologic and a device. When regulated independently, biologics and devices each have their own regulatory requirements. However, the regulatory requirements for a combination product comprised of a biologic administered with a delivery device can be more complex, because in addition to the individual regulatory requirements for each component, additional combination product regulatory requirements may apply. The Office of Combination Products at the FDA coordinates the review of such products and determines the primary mode of action of a combination product. The definition and regulatory requirements for combination products may differ significantly among countries in which we may seek approval of our product candidates.

FDA Regulation of Manufacturing

The FDA regulates the manufacturing process of pharmaceutical products, human tissue and cell products, and medical devices, requiring that they be produced in compliance with cGMP and cGTP. See “Manufacturing.” The FDA regulates and inspects equipment, facilities, laboratories and processes used in the manufacturing and testing of products prior to providing approval to market products. If after receiving approval from the FDA, a material change is made to manufacturing equipment or to the location or manufacturing process, additional regulatory review may be required. The FDA also conducts regular, periodic visits to re-inspect the equipment, facilities, laboratories and processes of manufacturers following an initial approval. If, as a result of those inspections, the FDA determines that equipment, facilities, laboratories or processes do not comply with applicable FDA regulations and conditions of product approval, the FDA may seek civil, criminal or administrative sanctions and/or remedies against the manufacturer, including suspension of manufacturing operations. Issues pertaining to manufacturing equipment, facilities or processes may also delay the approval of new products undergoing FDA review.

FDA Regulation of Advertising and Product Promotion

The FDA also regulates the content of advertisements used to market pharmaceutical and biologic products. Claims made in advertisements concerning the safety and efficacy of a product, or any advantages of a product over another product, must be supported by clinical data filed as part of an NDA, a BLA, or an amendment to an NDA or a BLA, and must be consistent with the FDA-approved labeling and dosage information for that product.

Pharmaceutical and biologic products may be promoted only for the approved indications in accordance with the approved label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label may be subject to significant liability. However, physicians may, in their independent medical judgment, prescribe legally available products for off-label uses. The FDA does not regulate the behavior of physicians in their choice of treatments but the FDA does restrict manufacturer’s communications on the subject of off-label use of their products.

Foreign Regulation

Sales of pharmaceutical products outside the U.S. are subject to foreign regulatory requirements that vary widely from country to country. Even if FDA approval has been obtained, approval of a product by comparable regulatory authorities of foreign countries must be obtained prior to the commencement of marketing the product in those countries. The time required to obtain such approval may be longer or shorter than that required for FDA approval.

Federal Funding and State Regulations

Effective July 7, 2009, the NIH adopted guidelines on the use of hES cells in federally funded research. The central focus of the guidelines is to assure that hES cells used in federally funded research are derived from human embryos that were created for reproductive purposes, are no longer needed for this purpose, and are voluntarily donated for research purposes with the informed written consent of the donors. hES cells that were not derived in compliance with the guidelines, are not eligible for use in federally funded research.

The State of California has adopted legislation and regulations that require institutions that conduct stem cell research to notify, and in certain cases obtain approval from, a Stem Cell Research Oversight Committee (“SCRO Committee”) before conducting the research. Under certain California regulations, all hES cell lines used in our research must be acceptably derived. California regulations further require certain records to be maintained with respect to stem cell research and the materials used. Lineage programs that involve the use of stem cells have been reviewed by a SCRO Committee to confirm compliance with federal and state guidelines.

The hES cell lines that we use are all on the NIH registry of lines that have been reviewed and meet standards for federal funding grants. All of our research programs utilize stem cells from established and well-characterized cell lines and which are capable of self-renewal and expansion through normal cellular division (mitosis). Our research programs do not require new tissue or cells from donors of any kind.

Health Insurance Portability and Accountability Act and Other Health Information Privacy and Security Laws

The Health Insurance Portability and Accountability Act (“HIPAA”), as amended by the Health Information Technology for Economic and Clinical Health Act (“HITECH”), and their respective implementing regulations impose obligations on “covered entities,” including certain healthcare providers, health plans, and healthcare clearinghouses, as well as their respective “business associates” that create, receive, maintain or transmit individually identifiable health information for or on behalf of a covered entity, and their subcontractors that use, disclose, access, or otherwise process individually identifiable protected health information, with respect to protecting the privacy, security, and transmission of protected health information. HIPAA also regulates standardization of data content, codes and formats used in healthcare transactions and standardization of identifiers for covered health plans and providers. Penalties for violations of HIPAA regulations include civil and criminal penalties. Additionally, HITECH created four new tiers of civil monetary penalties, amended HIPAA to make civil and criminal penalties directly applicable to business associates, and gave state attorneys general new authority to file civil actions for damages or injunctions in U.S. federal courts to enforce HIPAA and seek attorneys’ fees and costs associated with pursuing federal civil actions. In addition, certain state and foreign laws also govern the privacy and security of health information in some circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

Privacy and Data Security Laws

In the ordinary course of our business, we may collect, receive, store, process, generate, use, transfer, disclose, make accessible, protect, secure, dispose of, transmit, and share (collectively, processing) personal data and other sensitive information, including data we collect about trial participants in connection with clinical trials. Accordingly, we are, or may become, subject to numerous data privacy and security requirements related to data privacy, security, and protection under federal, state, local, and foreign laws, regulations, guidance, and industry standards. Compliance with such requirements increases the cost and complexity of doing business and non-compliance may result in, among other penalties and sanctions, substantial monetary fines. The data privacy, security, and protection laws to which we may be subject include, without limitation, the Federal Trade Commission Act, the California Consumer Privacy Act of 2018 (“CCPA”), as amended by the California Privacy Rights Act of 2020 (“CPRA”), Israel’s Protection of Privacy Law 5741-1981, the European Union’s General Data Protection Regulation 2016/679 (“EU GDPR”), the EU GDPR as it forms part of United Kingdom (“UK”) law by virtue of section 3 of the European Union (Withdrawal) Act 2018 (“UK GDPR”), and the ePrivacy Directive. In addition, several states within the United States have enacted or proposed data privacy laws, including Virginia, Colorado, Connecticut and Utah.

The CCPA and EU GDPR are examples of increasingly stringent and evolving regulatory frameworks related to personal data processing, which increase compliance obligations and exposure for noncompliance. For example, the CCPA imposes obligations on covered businesses to provide specific disclosures related to a business’s collection, use, and disclosure of personal data and a requirement to respond to certain requests from California residents related to their personal data. Also, the CCPA provides for civil penalties and a private right of action for certain data breaches. Under the CPRA, effective January 1, 2023, California residents also have the ability to limit use of certain sensitive personal data, establish restrictions on personal data retention, expand the types of data breaches that are subject to the CCPA’s private right of action. A new California Privacy Protection Agency was also established to implement and enforce the new law. U.S. federal and state consumer protection laws require us to publish statements that accurately and fairly describe how we handle personal data and choices individuals may have about the way we handle their personal data. The EU GDPR applies to any company established in the European Economic Area (“EEA”) and to companies established outside the EEA that process personal data in connection with the offering of goods or services to data subjects in the EEA or the monitoring of the behavior of data subjects in the EEA. These obligations may include limiting personal data processing to only what is necessary for specified, explicit, and legitimate purposes; requiring a legal basis for personal data processing; requiring the appointment of a data protection officer in certain circumstances; increasing transparency obligations to data subjects; requiring data protection impact assessments in certain circumstances; limiting the collection and retention of personal data; increasing rights for data subjects; formalizing a heightened and codified standard of data subject consents; requiring the implementation and maintenance of technical and organizational safeguards for personal data; mandating notice of certain personal data breaches to the relevant supervisory authority(ies) and affected individuals; and mandating the appointment of representatives in the UK and/or the EU in certain circumstances. Moreover, under the EU GDPR, government regulators may impose temporary or definitive bans on data processing, as well as fines of up to 20 million euros or 4% of a company’s annual global revenue, whichever is greater. Further, individuals may initiate litigation related to processing of their personal data. In addition, Israel’s Protection of Privacy Law 5741-1981 and the regulations promulgated thereunder impose certain obligations with respect to the manner personal data is processed, and government regulators may issue fines or sanctions for non-compliance.

Certain jurisdictions have enacted data localization laws and cross-border personal data transfer laws, which could make it more difficult to transfer information across jurisdictions (such as transferring or receiving personal data that originates in the EU or in other foreign jurisdictions). Existing mechanisms that facilitate cross-border personal data transfers may change or be invalidated. For example, absent appropriate safeguards or other circumstances, the EU GDPR generally restricts the transfer of personal data to countries outside of the EEA, such as the United States, that the European Commission does not consider to provide an adequate level of data privacy and security. The European Commission released a set of “Standard Contractual Clauses” (“SCCs”), that are designed to be a valid mechanism to facilitate personal data transfers out of the EEA to these jurisdictions. Currently, these SCCs are a valid mechanism to transfer personal data outside of the EEA, but there exists some uncertainty regarding whether the SCCs will remain a valid mechanism. Additionally, the SCCs impose additional compliance burdens, such as conducting transfer impact assessments to determine whether additional security measures are necessary to protect the at-issue personal data. In addition, Switzerland and the UK similarly restrict personal data transfers outside of those jurisdictions to countries, such as the United States, that do not provide an adequate level of personal data protection, and certain countries outside Europe (e.g., Israel) have also passed or are considering laws requiring local data residency or otherwise impeding the transfer of personal data across borders.

Federal and State Fraud and Abuse Laws

A variety of federal and state laws prohibit fraud and abuse. These laws are interpreted broadly and enforced aggressively by various state and federal agencies, including the Centers for Medicare & Medicaid Services (“CMS”), the Department of Justice, the Office of Inspector General for the U.S. Department of Health and Human Services (“HHS”), and various state agencies. In addition, the Medicare and Medicaid programs increasingly use a variety of contractors to review claims data and to identify improper payments as well as fraud and abuse. These contractors include Recovery Audit Contractors, Medicaid Integrity Contractors and Zone Program Integrity Contractors. In addition, CMS conducts Comprehensive Error Rate Testing audits, the purpose of which is to detect improper Medicare payments. Any overpayments identified must be repaid unless a favorable decision is obtained on appeal. In some cases, these overpayments can be used as the basis for an extrapolation, by which the error rate is applied to a larger universe of claims, and which can result in even higher repayments.

The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting, receiving, or providing remuneration, directly or indirectly, to induce or in return for either the referral of an individual, or the furnishing, recommending, or arranging for the purchase, lease or order of any healthcare item or service reimbursable, in whole or in part, under a federal healthcare program. The definition of “remuneration” has been broadly interpreted to include anything of value, including gifts, discounts, credit arrangements, payments of cash, ownership interests and providing anything at less than its fair market value. Recognizing that the federal Anti- Kickback Statute is broad and may prohibit certain common activities within the healthcare industry, the Office of Inspector General for HHS has issued a series of statutory exceptions and regulatory “safe harbors.” However, these exceptions and safe harbors are drawn narrowly and require strict compliance in order to offer protection from prosecution under the federal Anti-Kickback Statute. Although payment and business practices that meet the requirements of a safe harbor are not treated as offenses under the federal Anti-Kickback Statute, the failure of a transaction or arrangement to fit within a specific safe harbor does not necessarily mean that the transaction or arrangement is illegal or that prosecution under the federal Anti-Kickback Statute will be pursued. However, conduct and business arrangements that do not fully satisfy all requirements of an applicable safe harbor may result in increased scrutiny by government enforcement authorities and would be evaluated on a case-by-case basis based on a cumulative review of their facts and circumstances. Additionally, the Patient Protection and Affordable Care Act, as amended by the Healthcare and Education Reconciliation Act (collectively, the “ACA”) codified case law that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal False Claims Act.

The federal civil and criminal false claims laws, including the federal False Claims Act, which can be enforced by private citizens on behalf of the government, through civil whistleblower or qui tam actions, and civil monetary penalty laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent. Pharmaceutical and other healthcare companies have been prosecuted under these laws for alleged off-label promotion of drugs, purportedly concealing price concessions in the pricing information submitted to the government for government price reporting purposes, and allegedly providing free product to customers with the expectation that the customers would bill federal healthcare programs for the product. As a result of a modification made by the Fraud Enforcement and Recovery Act of 2009, a claim includes “any request or demand” for money or property presented to the U.S. government. In addition, manufacturers can be held liable under the federal False Claims Act even when they do not submit claims directly to government payors if they are deemed to “cause” the submission of false or fraudulent claims.

HIPAA also created new federal crimes, including healthcare fraud and false statements relating to healthcare matters. The healthcare fraud statute prohibits knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private third-party payers. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items or services. Similar to the federal Anti-Kickback Statute, a person or entity does not need to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation.

The federal Physician Payments Sunshine Act which require certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to CMS information related to payments or other transfers of value made to physicians (defined to include doctors, dentists, optometrists, podiatrists, and chiropractors), certain other healthcare professionals (such as physician assistants and nurse practitioners), and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members.

Many states have laws similar to the federal laws described above and the state laws may be broader in scope and may apply regardless of payor, such as state anti-kickback and false claims laws that may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third party payors, including private insurers, or that apply regardless of payor, state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government, state and local laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures, state laws that require the reporting of information related to drug pricing, and state and local laws requiring the registration of pharmaceutical sales representatives.

Additionally, the U.S. Foreign Corrupt Practices Act (“FCPA”) prohibits U.S. corporations and their representatives from offering, promising, authorizing or making payments to any foreign government official, government staff member, political party or political candidate in an attempt to obtain or retain business abroad. The scope of the FCPA includes interactions with certain healthcare professionals in many countries. Other countries have enacted similar anti-corruption laws and/or regulations.

If our operations are found to be in violation of any of the laws described above, or any other governmental regulations that apply to us, we may be subject to significant civil, criminal and administrative penalties, including sanctions, damages, disgorgement, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, imprisonment, integrity oversight and reporting obligations, contractual damages, reputational harm, diminished profits and future earnings, and curtailment or restructuring of our operations.

Coverage and Reimbursement

Patients generally rely on third-party payors to reimburse part or all of the costs associated with medical products. Accordingly, market acceptance of medical products can depend on the extent to which third-party coverage and reimbursement is available from government health administration authorities, private healthcare insurers and other healthcare funding organizations. No uniform policy for coverage and reimbursement exists in the United States, and coverage and reimbursement can differ significantly from payor to payor. Decisions regarding whether to cover any of our product candidates, if approved, the extent of coverage and amount of reimbursement to be provided are made on a plan-by-plan basis. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement rates, but also have their own methods and approval process apart from Medicare determinations. As a result, the coverage determination process is often a time-consuming and costly process that will require us to provide scientific and clinical support for the use of our product candidates to each payor separately, with no assurance that coverage and adequate reimbursement will be applied consistently or obtained in the first instance. Pharmaceutical companies may be required to provide specified rebates or discounts on the products it sells to certain government funded programs, including Medicare and Medicaid, and those rebates or discounts have increased over time. The ACA increased many of these mandatory discounts and rebates required and imposed a new branded prescription pharmaceutical manufacturers and importers fee payable each year by certain pharmaceutical companies and manufacturers.

Outside of the United States, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug pricing vary widely from country to country. For example, the EU provides options for its member states to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. A member state may approve a specific price for the medicinal product, or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market. Historically, products launched in the EU do not follow price structures of the United States and generally tend to be significantly lower.

Healthcare Reform

The United States and some foreign jurisdictions are considering or have enacted a number of reform proposals to change the healthcare system. There is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality or expanding access. In the United States, the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by federal and state legislative initiatives, including those designed to limit the pricing, coverage, and reimbursement of pharmaceutical and biopharmaceutical products, especially under government-funded healthcare programs, and increased governmental control of drug pricing.

In March 2010, the ACA was signed into law, which substantially changed the way healthcare is financed by both governmental and private insurers in the United States, and significantly affected the pharmaceutical industry. The ACA contains a number of provisions of particular import to the pharmaceutical and biotechnology industries, including, but not limited to, those governing enrollment in federal healthcare programs, a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs that are inhaled, infused, instilled, implanted or injected, and annual fees based on pharmaceutical companies’ share of sales to federal healthcare programs. Since its enactment, there have been judicial, Congressional, and executive branch challenges to certain aspects of the ACA. For example, legislation enacted in 2017, informally known as the Tax Cuts and Jobs Act (the “2017 Tax Act”), among other things, removes penalties for not complying with ACA’s individual mandate to carry health insurance. On June 17, 2021, the U.S. Supreme Court dismissed a challenge on procedural grounds that argued the ACA is unconstitutional in its entirety because the individual mandate was repealed by Congress. Thus, the ACA will remain in effect in its current form. Moreover, on January 28, 2021, President Biden issued an executive order that initiated a special enrollment period for purposes of obtaining health insurance coverage through the ACA marketplace, which began on February 15, 2021 and remained open through August 15, 2021. The executive order also instructed certain governmental agencies to review and reconsider their existing policies and rules that limit access to healthcare, including among others, reexamining Medicaid demonstration projects and waiver programs that include work requirements, and policies that create unnecessary barriers to obtaining access to health insurance coverage through Medicaid or the ACA. It is possible that the ACA will be subject to judicial or Congressional challenges in the future. It is unclear how any such challenges and other litigation, and the healthcare reform measures of the Biden administration will impact the ACA.‌

In addition, other legislative changes have been proposed and adopted since the ACA was enacted. On August 2, 2011, the Budget Control Act of 2011 was signed into law, which includes reductions to Medicare payments to providers of 2% per fiscal year, which went into effect on April 1, 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2031, except for a temporary suspension from May 1, 2020 through March 31, 2022 due to the COVID-19 pandemic, unless additional Congressional action is taken. Under current legislation, the actual reduction in Medicare payments will vary from 1% in 2022 to up to 3% in the final fiscal year of this sequester. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, reduced Medicare payments to several providers, including hospitals, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. Further, on March 11, 2021, President Biden signed the American Rescue Plan Act of 2021 into law, which eliminates the statutory Medicaid drug rebate cap, currently set at 100% of a drug’s average manufacturer price, for single source and innovator multiple source drugs, beginning January 1, 2024. Congress is considering additional health reform measures.

Moreover, there has recently been heightened governmental scrutiny over the manner in which manufacturers set prices for their marketed products, which has resulted in several presidential executive orders, Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for drug products. For example, on July 24, 2020 and September 13, 2020, the Trump administration announced several executive orders related to prescription drug pricing that attempted to implement several of the administration’s proposals. As a result, the FDA concurrently released a final rule and guidance in September 2020 providing pathways for states to build and submit importation plans for drugs from Canada. Further, on November 20, 2020, the HHS finalized a regulation removing safe harbor protection for price reductions from pharmaceutical manufacturers to plan sponsors under Medicare Part D, either directly or through pharmacy benefit managers, unless the price reduction is required by law. The rule also creates a new safe harbor for price reductions reflected at the point-of-sale, as well as a new safe harbor for certain fixed fee arrangements between pharmacy benefit managers and manufacturers. The implementation of the rule was delayed until 2032 by the Inflation Reduction Act of 2022. On November 20, 2020, CMS issued an interim final rule implementing President Trump’s Most Favored Nation executive order, which would tie Medicare Part B payments for certain physician-administered drugs to the lowest price paid in other economically advanced countries. The Most Favored Nation regulations mandate participation by identified Medicare Part B providers and will apply in all U.S. states and territories for a seven-year period beginning January 1, 2021, and ending December 31, 2027. As a result of litigation challenging the Most Favored Nation model, on December 27, 2021 CMS published a final rule that rescinds the Most Favored Nation model interim final rule. Further, in July 2021, the Biden administration released an executive order that included multiple provisions aimed at prescription drugs. In response to President Biden’s executive order, on September 9, 2021, the HHS released a Comprehensive Plan for Addressing High Drug Prices that outlines principles for drug pricing reform. The plan sets out a variety of potential legislative policies that Congress could pursue as well as potential administrative actions HHS can take to advance these principles. No legislation or administrative actions have been finalized to implement these principles.

In August 2022, the Inflation Reduction Act of 2022 was signed into law by President Biden. The new legislation has implications for Medicare Part D, which is a program available to individuals who are entitled to Medicare Part A or enrolled in Medicare Part B to give them the option of paying a monthly premium for outpatient prescription drug coverage. Among other things, the Inflation Reduction Act of 2022 requires manufacturers of certain drugs to engage in price negotiations with Medicare (beginning in 2026), with prices that can be negotiated subject to a cap; imposes rebates under Medicare Part B and Medicare Part D to penalize price increases that outpace inflation (first due in 2023); and replaces the Part D coverage gap discount program with a new discounting program (beginning in 2025). The Inflation Reduction Act of 2022 permits the Secretary of the HHS to implement many of these provisions through guidance, as opposed to regulation, for the initial years.

At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing.

Major Customers and Sources of Revenues

Major Sources of Revenues

The following table shows our major sources of revenues, as a percentage of total revenues, that were recognized during the years ended December 31, 2022 and 2021:

Geographic Area

The following table shows the geographic sources of revenue that were recognized during the years ended December 31, 2022 and 2021 (dollar amounts are in thousands):

(1) Foreign revenues are primarily generated from grants in Israel.

Marketing

We do not have established marketing, sales or distribution infrastructure or capabilities. In order to commercialize any of our product candidates if approved for commercial sale, we must either establish a sales and marketing organization with technical expertise and supporting distribution capabilities or collaborate with third-parties that have sales and marketing experience. As we move our product candidates through development toward regulatory approval, we intend to evaluate options for each product candidate’s commercialization strategy. These options include building our own sales force and other commercial infrastructure, entering into strategic marketing partnerships with third parties, out-licensing the product to other pharmaceutical or biotechnology companies, and combinations of these strategies.

Competition

The cell therapy industry is characterized by rapid innovation, intense and dynamic competition with a strong emphasis on proprietary products. While we believe that our technology, manufacturing capabilities, scientific knowledge, and experience in the field of cell therapy provide us with competitive advantages, we face potential competition from many different sources, including major pharmaceutical and biotechnology companies with substantially greater financial and other resources than we have, academic institutions and governmental agencies and public and private research institutions, as well as standard-of-care treatments, new products undergoing development and combinations of existing and new therapies. Any product candidates that we successfully develop and commercialize will compete with existing therapies and new therapies, including combinations thereof, that may become available in the future.

As mentioned above, some of our competitors have substantially greater financial and other resources than we have, such as larger research and development staff and well-established marketing and salesforces, or may operate in jurisdictions with lower standards of evidence to bring products to market. For example, we are aware that some of our competitors, including Bristol-Myers Squibb Company, Novo Nordisk A/S, Novartis AG, Johnson & Johnson, Merck & Co Inc., Gilead Sciences Inc., Astellas Pharma Inc., Bayer AG, BioNTech SE, Moderna Inc., Sana Biotechnology Inc., Senti Biosciences Inc., Iveric Bio Inc., Apellis Pharmaceuticals Inc., Century Therapeutics Inc., and Allogene Therapeutics Inc., may be conducting clinical trials for therapies that could compete with our cell therapy programs.

Corporate Information

Lineage is incorporated in the State of California. Our common shares trade on the NYSE American and the Tel Aviv Stock Exchange under the symbol “LCTX.” Our principal executive offices are at 2173 Salk Avenue, Suite 200, Carlsbad, CA 92008, USA, and our phone number at that address is (442) 287-8990. Our website address is www.lineagecell.com (http://www.lineagecell.com). The information on, or that can be accessed through our website, is not part of this report. Lineage routinely uses its website as a means of disclosing material non-public information and for complying with its disclosure obligations under Regulation FD. We also make available, free of charge through our website, our most recent annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports as soon as reasonably practicable after the reports are electronically filed with or furnished to the SEC.

An investment in our common shares involves a high degree of risk. You should carefully consider all the risk factors described below, as well as the other information in this report, when evaluating our business and before deciding whether to purchase, hold or sell our common shares. Each of these risk factors, as well as additional risks not presently known to us or that we currently consider immaterial, could harm our business, financial condition, results of operations and/or growth prospects, as well as adversely affect the market price of our common shares, in which case you may lose all or part of your investment.

Risks Related to Our Business Operations and Capital Requirements

We have incurred operating losses since inception, and we do not know if or when we will attain profitability.

Our total operating losses for the fiscal years ended December 31, 2022 and 2021 were $22.5 million and $49.2 million, respectively, and we had an accumulated deficit of $363.4 million as of December 31, 2022. Since inception, we have incurred significant operating losses and we expect to continue to incur significant operating losses for the foreseeable future. Unless and until we or a third-party collaborator succeed in developing, obtaining regulatory approval for, and generating substantial revenue from sales of one or more of our product candidates, we do not expect to become profitable. All of our product candidates will require substantial additional development time and resources before we or any collaborator would be able to apply for or receive any regulatory approval to market and sell a product, and the timeline for and outcome of these development efforts is highly uncertain. We anticipate our operating losses will increase substantially as we continue our development of, seek regulatory approval for and potentially commercialize our product candidates and seek to identify, assess, acquire, in-license or develop additional product candidates. We may never achieve profitability.

To become and remain profitable, we must succeed in developing and eventually commercializing products that generate significant revenue. This will require us and our collaborators to be successful in a range of challenging activities, including completing clinical and nonclinical studies of our product candidates, obtaining regulatory approval for these product candidates, manufacturing, marketing, and selling any approved products, and satisfying any post-marketing regulatory requirements. We are attempting to develop new technology and therapeutic products. Cell therapy is a nascent field with limited regulatory approval precedent, which makes it difficult to predict the time and cost of product candidate development and seeking regulatory approval. The regulatory pathway with the FDA and comparable foreign regulatory authorities may be more complex, time-consuming, and unpredictable relative to more well-known therapeutic approaches. We and our collaborators may never succeed in these activities and, even if we do, may never generate revenues that are significant enough for us to achieve profitability. If we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Our failure to become and remain profitable would decrease the value of our company and could impair our ability to raise capital, maintain our research and development efforts, expand our business, or continue our operations. A decline in the value of our company could also cause you to lose all or part of your investment.

Our investigational allogeneic cell therapies represent a novel approach to the treatment of serious medical conditions, which gives rise to significant challenges. We or our collaborators may not succeed in developing any of our product candidates.

We are developing a pipeline of allogeneic cell therapy product candidates with cells that we create by applying proprietary differentiation protocols to established pluripotent cell lines and which must be either transplanted into patients to replace or support cells that are dysfunctional or absent due to degenerative disease or traumatic injury or administered by injection as a means of helping the body mount a more robust and effective immune response to cancer or infectious diseases. Allogeneic cell therapy is an area of therapeutic medical intervention that is still in its infancy, and as such, it is difficult to accurately predict the type and scope of challenges we and our collaborators may face during the development of our product candidates. We face significant challenges and uncertainties associated with the manufacture, preclinical and clinical development, regulatory approval pathway, and third-party payor coverage and reimbursement of our product candidates required for successful commercialization, including:

• manufacturing our product candidates to our internal standards, as well as to that of applicable regulatory specifications, in a timely manner, and on the scale necessary to support larger-scale clinical trials, and, if approved, commercialization;
• understanding and addressing variability in our cell manufacturing processes, which could affect our ability to produce clinical trial material and, if approved, commercial product in a reliable and consistent manner;
• designing and completing clinical trials of our product candidates that will demonstrate their safe and effective use to treat the targeted disease or other medical condition;
• sourcing clinical and, if approved, commercial supplies of key components required for the manufacture of our product candidates;
• developing formulations of our cells that reduce or eliminate dose preparation or other complexities of handling and administration of our product candidates at the point of care;
• identifying, developing and validating delivery systems and methods for successful surgical transplantation of our cells;
• obtaining regulatory approval, as the regulatory framework for approval of potential allogeneic cell therapies are evolving;
• establishing sales, marketing, and compliance capabilities upon obtaining any regulatory approval to gain acceptance of a novel therapy;
• obtaining sufficient product coverage and reimbursement from third-party payors such as government healthcare administration authorities and private healthcare insurers for any approved product to enable the product to compete in the marketplace and become commercially profitable; and
• obtaining and maintaining intellectual property protection for our product candidates, the operations used to manufacture them and the methods for using them in order to prevent third parties from making, using, selling, offering to sell or importing our product candidates or otherwise exploiting our cell manufacturing processes.

If we are not successful in addressing key challenges in development and commercialization of our cell therapy product candidates, or if our product candidates and technologies do not prove to be safe or effective for the indications for which they are being developed, our business prospects and revenue opportunities will be materially limited.

We will continue to spend a substantial amount of our capital on research and development, but we might not succeed in developing products that are safe and effective for their target indications or commercially viable.

Our research and development activities are costly, time consuming, and their results are uncertain. We incurred research and development expenses amounting to approximately $14.0 million and $33.9 million during the fiscal years ended December 31, 2022 and 2021, respectively, and we expect to continue to incur substantial research and development expenses. If we successfully develop a new technology or product, refinement of the new technology or product and definition of the practical applications and limitations of the technology or product may take years and require large sums of money. Clinical trials of new therapeutic products, particularly those products that are regulated as biologics, drugs, or devices, such as our product candidates, are very expensive and take years to complete. Only a small percentage of therapeutic product candidates that enter the development process ever receive marketing approval. Even with substantial spending on research and development of our product candidates, they might not prove to be safe or efficacious in the human medical applications for which they are being developed, or they may prove too expensive to manufacture or otherwise fail to gain sufficient market acceptance to be commercially viable.

We will need to obtain substantial additional funding to complete the development and seek regulatory approval of our product candidates and to commercialize products approved for marketing, if any. If we are unable to obtain adequate capital when needed, we may delay, reduce, limit the pace of, suspend or discontinue our product and technology development programs or other operations, which could significantly harm our business and prospects and cause the market price of our common shares to decline.

At December 31, 2022, we had $57.9 million of cash, cash equivalents and marketable securities. We believe that our cash, cash equivalents and marketable securities as of December 31, 2022 will be sufficient to fund our planned operations for at least the next 12 months after the issuance of this report; however, these resources will not be sufficient to fund our product candidates through regulatory approval, and we will need to raise substantial additional capital to complete the development and seek regulatory approval of our product candidates and to commercialize products approved for marketing, if any. In addition, we may seek additional capital due to favorable market conditions or strategic considerations even if we believe we have sufficient funds for our planned operations.

Until such time as we are able to generate sufficient revenues from product sales, royalties or license fees, if ever, we expect to fund our operations through equity offerings, debt financings or other third-party capital sources, including potentially new grants from governmental entities or strategic alliances, collaborations, licenses or other similar arrangements. However, additional capital may not be available to us when needed, on favorable terms, or at all, and any additional capital raised may not be sufficient to enable us to complete development or obtain regulatory approval of our product candidates or commercialize approved products, if any. Our past success in raising capital through equity offerings, strategic collaborations and grants from governmental entities should not provide any assurance that we will be successful in raising additional capital through any of those means when needed, or at all. We expect our ability to raise additional capital will depend not only on progress we and our collaborators make in developing our technologies and product candidates, but also on factors outside of our control that affect access to capital and conditions in the capital markets. A low trading volume, share price and market capitalization together with limited revenue, net losses, and limited amount of unissued authorized common shares may make it difficult and expensive for us to raise additional capital through equity or debt financings. Our ability to obtain additional funds and the amount and type of financing available to us may be adversely impacted by unstable and unfavorable market conditions. An economic downturn, recession or recessionary concerns, delay or failure of the U.S. government to raise the federal debt ceiling, increased inflation, rising interest rates, public health emergencies such as the COVID-19 pandemic, geopolitical conflicts including the war in Ukraine, terrorist attacks, global supply chain disruptions. natural or environmental disasters, strained relations between the U.S. and various other countries, social and political discord and unrest in the U.S. and various other countries can be expected to negatively impact financial markets. Volatility and deterioration in the financial markets and rising interest rates may make equity or debt financings more difficult, more costly or more dilutive and may increase competition for, or limit the availability of, funding from other third-party sources such as from strategic collaborations and grants from governmental and other entities. Our ability to obtain additional funds and the amount, type and terms of any potential financing may also be adversely affected by the performance of other companies perceived as comparable to us. For example, development setbacks or failures in cell therapies being developed by third parties could have a negative effect on potential investor or strategic collaborator sentiment for our technologies and product candidates.

If we are unable to raise capital when needed or on attractive terms, we may be forced to significantly delay, reduce, limit the pace of, suspend or discontinue some or all aspects of our product and technology development programs or other operations, fail to meet obligations under our in-license agreements and relinquish important rights, and forego opportunities to expand our pipeline, in which case, our ability to achieve our operational goals could be materially and adversely affected. In addition, if we do not have adequate capital, we may seek strategic alliances for research and development programs at an earlier stage than we would otherwise desire or on terms less favorable than might otherwise be available, or relinquish or license on unfavorable terms, our rights to technologies or future product candidates that we otherwise would seek to develop or commercialize ourselves, which could have a material adverse effect on our business and prospects.

Our forecast of the period of time through which our financial resources will support our planned operations is based on a number of assumptions that may prove to be wrong or require adjustment as a result of business decisions, the risks, uncertainties other factors discussed elsewhere in this Risk Factors section or factors not presently known or material to us, and we may use our available financial resources sooner than we currently expect. Our future funding requirements will depend on many factors, including:

• scope, progress and results of our ongoing and planned preclinical studies, clinical trials, and nonclinical activities for our product candidates;
• unanticipated serious safety concerns related to the use of our product candidates;
• timing of licensing payments we may be required to make based on the development of our product candidates;
• the number, and development requirements of product candidates that we may pursue;
• the timing and outcome of regulatory review of our product candidates;
• changes in laws or regulations applicable to our product candidates, including but not limited to clinical trial and manufacturing requirements for approval;
• our decisions to initiate additional clinical trials, not to initiate any clinical trial or to terminate an existing clinical trial;
• the cost of obtaining and the availability of materials, equipment and devices that are necessary for the production or administration of our product candidates;
• whether we decide to enter into a new third-party collaborations for development or commercialization of our product candidates and the terms of any such collaboration;
• the cost and timing of establishing and validating new manufacturing processes or facilities for our product candidates and any approved products;
• additions or departures of key management or scientific personnel.

If we cannot conduct our planned operations or otherwise capitalize on business opportunities due to a lack of capital, our business, financial condition, and results of operations could be adversely affected and the market price of our common shares may decline.

Raising additional capital may cause dilution to our existing shareholders, restrict our operations, or require us to relinquish rights to or dilute our economic interest in our product candidates or technology on terms unfavorable to us.

We may seek additional capital through a variety of means, including equity offerings, debt financings or other third-party funding, including grants or new strategic alliances and licensing or collaborations. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect your rights as a shareholder. Any debt capital financing may involve covenants that restrict our operations, including limitations on additional borrowing and on the use of our assets. If we raise capital through up-front payments or milestone payments pursuant to strategic collaborations with third parties, we have to relinquish valuable rights to our product candidates and technology or grant licenses on terms that are not favorable to us. Any such arrangements may be dilutive to our ownership or economic interest in the products we develop, and we might have to accept royalty payments on product sales rather than receiving the gross revenues from product sales. See, for example, the terms of our agreement with Roche to develop and commercialize OpRegen. Grants from third parties may involve covenants that restrict our operations, require us to relinquish valuable rights in our products, technology and other intellectual property and may be dilutive to our economic interest in products and technologies we develop with such funding. For example, as discussed in Note 14 (Commitments and Contingencies) to our consolidated financial statements included in this report, pursuant to the terms of grants received by Cell Cure from the Israeli government, there are limitations on our ability to manufacture products and transfer or license technologies outside of Israel and considerable contingent financial obligations to the IIA with respect to products, technologies and intellectual property developed with the support of IIA grant funding, which includes the OpRegen program, and, as discussed below in this Risk Factors section, pursuant to the terms of a grant we received from the CIRM in support of clinical development of OPC1, we have royalty payment obligations to CIRM based on net sales of products developed with the support of the CIRM funding, if any.

Our ability to raise capital through equity or convertible debt financings may be limited by the amount of our authorized and unissued common shares and applicable rules of the SEC and NYSE American.

Our ability to raise capital through the issuance and sale of our common shares or securities exercisable for or convertible into our common shares is limited by the number of common shares we are authorized to issue that are not issued and outstanding or reserved for future issuance. We are currently authorized to issue up to 250,000,000 common shares and, as of December 31, 2022, 170,093,114 common shares were issued and outstanding and 19,112,202 shares are reserved for issuance upon exercise of outstanding stock options or upon the vesting and settlement of outstanding restricted stock units or for future equity awards under our equity incentive plan, which means only 60,794,684 authorized common shares were unreserved and available for issuance. Our ability to raise capital through the sale of equity securities may also be limited by various rules and regulations, including rules of the SEC, the NYSE American securities exchange or any other securities exchange on which our common shares are listed, which place limits on the amount of securities that we may sell in certain circumstances or require shareholder approval to sell securities in excess of certain amounts. We may have to forego opportunities to raise capital on favorable terms if we do not have sufficient authorized and unissued common shares or are otherwise limited by applicable rules and regulations.

Obtaining shareholder approval may be a costly and time-consuming process, and seeking shareholder approval could delay our ability to secure otherwise available capital, or cause us to miss such opportunities entirely, which may harm our business and prospects, and there is no guarantee our shareholders ultimately would approve a proposed increase in our authorized common shares. Any increase in the number of our authorized common shares would require approval of a majority of our outstanding common shares entitled to vote. We could face difficulties in soliciting a sufficient number of shareholder proxies and may have to adjourn or postpone a shareholder meeting, which would further increase the time and expense of obtaining shareholder approval. If our shareholders do not approve a proposed increase in our authorized common shares or a proposed offering and sale involving our equity securities, our ability to raise additional capital may be materially and adversely impacted, as well as our ability to pursue business opportunities where our common shares may be used as consideration, such as strategic transactions to expand our product pipeline, and to retain and recruit key personnel and other employees.

Failure by the U.S. government to raise the federal debt ceiling could materially and adversely affect our financial condition.

As of December 31, 2022, we had $46.1 million in marketable debt securities, all of which were U.S. Treasury securities. U.S. Treasury securities historically have been highly liquid and carried relatively low risk. However, in January 2023, the U.S. reached its debt ceiling, requiring the U.S. Treasury to take extraordinary measures to avoid default. The U.S. Treasury expects to exhaust these measures by early June 2023, and if U.S. lawmakers do not pass legislation to raise the federal debt ceiling by such time, it is possible that the U.S. could default on its debt obligations. Uncertainty surrounding the trading market for U.S. government securities or impairment of the U.S. government’s ability to satisfy its obligations under its treasury securities may negatively impact the liquidity and valuation of our investments in U.S. treasury securities.

We are dependent on our third-party collaboration with Roche to develop and commercialize OpRegen. If Roche is not successful in developing and commercializing OpRegen and/or Roche terminates the collaboration, we will lose a significant source of potential revenue.

We currently have a collaboration and license agreement with Roche, pursuant to which we license to Roche rights to develop and commercialize our retinal pigment epithelium cell therapies, including OpRegen (the “Licensed Products”), for the treatment of ocular disorders, including age-related macular degeneration with geographic atrophy. Roche is obligated to pay us milestone payments upon the achievement of specified developmental, regulatory and commercialization milestones. In addition, Roche is obligated to pay us royalties upon sales of the Licensed Products, if any. All regulatory and commercial milestone payments and royalty payments are subject to the existence of certain intellectual property rights that cover OpRegen at the time such payments would otherwise become due, and the royalties on net sales of OpRegen are subject to financial offsets based on the existence of competing products.

We are expecting Roche to develop and commercialize the Licensed Products, and if Roche is not able to develop and commercialize the Licensed Products, determines not to continue to pursue development and commercialization of the Licensed Products, or determines to terminate the collaboration at any time in its sole discretion, we will not receive any future milestone or royalty payments under the agreement which would harm our business, business prospects, financial condition and results of operations.

Roche may determine not to pursue development and commercialization and/or to terminate the collaboration, in its sole discretion, for many reasons, including:

• delays in development, manufacture or clinical supply of OpRegen;
• Roche may believe that data generated in clinical trials for OpRegen may be negative, inconclusive, or do not otherwise demonstrate adequate efficacy or clinical benefit to warrant further development or commercialization;
• Roche may conclude that the commercial landscape in GA secondary to AMD has significantly changed with the FDA approval of Apellis Pharmaceuticals, Inc.’s Syfovre® (pegcetacoplan injection) and FDA acceptance of Iveric Bio, Inc.’s new drug application for Zimura® (avacincaptad pegol);
• Roche may not dedicate the resources necessary to carry OpRegen through clinical development, regulatory approval, or commercialization;
• Roche may conclude that the commercial potential of OpRegen does not meet its internal thresholds or yield a timely return on its investment in OpRegen;
• Roche may choose not to develop and commercialize OpRegen in certain, or any, markets or for one or more indications, if at all;
• Roche may change the focus of its development or commercialization efforts or prioritize other programs more highly and, accordingly, reduce the efforts and resources allocated to OpRegen;
• Roche may be unable to obtain regulatory clearances or approvals to continue clinical development or commercialization of OpRegen in a timely manner, or at all;
• the failure to develop a formulation and/or manufacturing process for OpRegen that Roche believes is commercially viable in a timely manner, or at all; or
• the loss or impairment of intellectual property rights related to OpRegen.

If Roche terminates the collaboration:

• we would no longer have the right to receive any milestone payments or royalties thereunder;
• further development of OpRegen, if any, would be significantly delayed or terminated;
• we would bear all risks and costs related to any further clinical development, manufacturing, regulatory approval and commercialization OpRegen, if any;

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• we might determine that the commercial potential of OpRegen does not warrant further development of OpRegen;
• we would need to raise additional capital if we were to choose to pursue OpRegen development on our own, or we would need to establish alternative collaborations with third parties, which might not be possible in a timely manner, or at all; and
• if we were to choose to pursue OpRegen development independently, we would need to work collaboratively with Roche to transfer the OpRegen program back to us, and such a transfer might take significant amounts of time, would be resource intensive and costly, and might not be feasible.

Any loss or termination of rights under the collaboration will cause us to lose a significant source of potential revenue and could significantly delay or result in the discontinuation of development of OpRegen or significantly diminish the commercial potential of OpRegen, which would have a material and adverse effect on our company, financial condition and results of operations and could cause the market price of our common shares to decline.

We may expend our limited resources to pursue particular product candidates and fail to capitalize on other product candidates that may be more profitable or for which there is a greater likelihood of success.

We have multiple cell therapy programs in development and limited resources. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our spending on current and future research and development programs and product candidates may not yield any commercially viable products. If we do not accurately evaluate the clinical or commercial potential or target market for a particular product candidate, we may focus our resources on product candidates that do not demonstrate successful clinical results or commercial viability at the expense of other programs that may have had greater success, or relinquish valuable rights to that product candidate through future collaborations, licenses and other similar arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such product candidate.

If we fail to meet our obligations under our in-license agreements, we may lose our rights to key technologies on which our business depends.

Our business depends on several critical technologies that are based in part on technology licensed from third parties. Those third-party license agreements impose obligations on us, including payment obligations and obligations to pursue development of commercial products under the licensed patents or technology. If a licensor believes that we have failed to meet our obligations under a license agreement, the licensor could seek to limit or terminate our license rights, which could lead to costly and time-consuming litigation and, potentially, a loss of the licensed rights. During the period of any such litigation, our ability to carry out the development and commercialization of potential products, and our ability to raise any capital that we might then need, could be significantly and negatively affected. If our license rights were restricted or ultimately lost, we would not be able to continue to use the licensed technology in our business. Our license agreements are discussed in more detail under “Licensed Technology and Product Development Agreements” in “Part I. Business,” above.

We may acquire or acquire rights to new technologies, product candidates and other assets or businesses, which could fail to result in a commercial product or net sales, divert our management’s attention, result in additional dilution to our shareholders or otherwise disrupt our business and adversely affect our results of operations.

We evaluate and consider strategic opportunities on an ongoing basis that we believe could complement or expand our portfolio, enhance our technical capabilities or otherwise offer growth opportunities. We may in the future acquire or acquire rights to develop and commercialize new technologies, product candidates and other assets or businesses or pursue joint ventures or investments in complementary businesses. However, we may not be able to successfully complete any in-license, acquisition or other strategic transaction we choose to pursue, and we may not successfully integrate any acquired or licensed technology, development program or business in a cost-effective and non-disruptive manner. The pursuit of these potential transactions may divert the attention of management and cause us to incur significant costs and expenses in identifying, investigating and pursuing suitable opportunities and transactions, even if we do not complete the transaction. We may not be able to identify desirable targets or be successful in entering into an agreement with any particular target. Furthermore, the anticipated benefits of any strategic transaction may not materialize.

In addition, we may not be able to successfully integrate any acquired personnel, operations and technologies, or effectively manage the combined business following an acquisition. Acquisitions could also result in dilutive issuances of equity securities, the use of our available cash, or the incurrence of debt, which could harm our operating results. We also face risk of shareholder lawsuits in connection with acquisitions that can divert management’s focus from operating our business and result in significant legal and other expenses, which could harm our operating results and financial condition. For example, we recently settled a putative shareholder class action lawsuit relating to our acquisition of Asterias after more than three years of litigation. See Note 14 (Commitments and Contingencies) to our consolidated financial statements included in this report. In addition, if an acquired technology, product candidate or other asset or business fails to meet our expectations, our business, financial condition and results of operations may be negatively affected. Additional risks we may face in connection with acquisitions include:

• diversion of management time and focus from operating our business to addressing acquisition and integration challenges;
• integration of cGMP manufacturing operations from an acquired business or company;
• retention of key employees from an acquired business or company;
• changes in relationships with other collaborators as a result of new program or product acquisitions or strategic positioning resulting from the acquisition;
• the need to implement or improve controls, procedures, and policies at the acquired business or company;
• financial reporting, revenue recognition or other financial or control deficiencies of an acquired company that we don’t adequately address and that cause our reported results to be incorrect;
• liability for activities of an acquired company before the acquisition, including intellectual property infringement claims, misappropriation or other violation, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities;
• unanticipated write-offs or charges; and
• litigation or other claims in connection with an acquired company, including claims from terminated employees, vendors, former shareholders or other third parties.

Our failure to address these risks or other problems encountered in connection with acquisitions and investments could cause us to fail to realize the anticipated benefits of these acquisitions or investments, cause us to incur unanticipated liabilities, and harm our business generally.

All of our manufacturing operations currently are conducted at our facility in Jerusalem, Israel. Accordingly, political, economic and military conditions in Israel could directly affect our business. Any event or condition that significantly disrupts our ordinary course of operations at our Jerusalem facility could harm our business and materially and adversely affect our financial condition and operating results.

We or our collaborators, suppliers, CROs, other service providers, or other third parties on which we rely may experience interruptions to our operations, including the conduct of our research and development programs, clinical trials, and manufacturing operations, due to natural disasters, public health emergencies, such as the COVID-19 pandemic, geopolitical conflicts, political and economic instability, acts of terrorism, or hardware, software, telecommunication or electrical failures, which could significantly disrupt or harm our business.

Currently, all of our cGMP manufacturing processes, including cell banking and product manufacturing for our cell therapy product candidates, are conducted by our subsidiary, Cell Cure, at its facility in Jerusalem, Israel, and more than two-thirds of our employees are Cell Cure employees who are based in the same facility. Accordingly, political, economic and military conditions in Israel could directly affect our business. In addition, our operations are vulnerable to significant disruption if a natural disaster, public health emergency, terrorist attack, act of war, power outage or any other sudden, unforeseen and severe event or condition damages, destroys or otherwise prevents us from using, or disrupts normal operations at, this facility. For example, a natural disaster, explosion, fire or prolonged power outage could result in damage to or destruction of materials and equipment that are critical for our research and manufacturing operations, including our cell banks, or otherwise prevent us from conducting product testing or manufacturing sufficient clinical supplies, which would delay the advancement of our programs and materially harm our business, operating results, prospects, or financial condition. Our cell therapy product candidates are manufactured by starting with cells which are stored in the form of a master cell bank. While we have taken precautions to safeguard our cell banks from catastrophic events and we take precautions when transporting our cell banks, it is possible that we could lose one or more master cell banks and have our manufacturing severely impacted by the need to replace a cell bank. The disaster recovery and business continuity plans we currently have in place are limited and are unlikely to prove adequate in the event of a serious disaster or similar event. Any natural or manmade disaster affecting our Cell Cure facility or employees could materially harm our business.

Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners, or a significant downturn in the economic or financial condition of Israel, could adversely affect our operations. Ongoing and revived hostilities or other Israeli political or economic factors could harm our operations, product candidate development and results of operations. Although Israel has entered into various agreements with Egypt, Jordan, the Palestinian Authority and with various states in the Persian Gulf, there has been a continuous unrest and terrorist activity with varying levels of severity. In addition, Israel faces threats from more distant neighbors, in particular, Iran. Our insurance policies do not cover us for the damages incurred in connection with these conflicts or for any resulting disruption in our operations. The Israeli government, as a matter of law, provides coverage for the reinstatement value of direct damages that are caused by terrorist attacks or acts of war; however, the government may cease providing such coverage or the coverage might not be enough to cover potential damages. In the event that hostilities disrupt the ongoing operation of our Jerusalem facility, our operations may be materially adversely affected.

Cell Cure is an Israeli company. Several countries, principally in the Middle East, still restrict doing business with Israel and Israeli companies, and additional countries may impose restrictions on doing business with Israel and Israeli companies, whether as a result of hostilities in the region or otherwise. In addition, there have been increased efforts by activists to cause companies, research institutions and consumers to boycott Israeli goods and cooperation with Israeli-related entities based on Israeli government policies. Such actions, particularly if they become more widespread, may adversely impact our ability to obtain supplies necessary to our manufacturing operations, cooperate with research institutions and collaborate with other third parties. Any hostilities involving Israel, any interruption or curtailment of trade or scientific cooperation between Israel and its present partners, or a significant downturn in the economic or financial condition of Israel could adversely affect our business, financial condition and results of operations. We may also be targeted by cyber terrorists specifically because Cell Cure is an Israeli-related company.

Israeli citizens are obligated to perform several days, and in some cases more, of annual military reserve duty each year until they reach the age of 40 (or older, for reservists who are military officers or who have certain occupations) and, in the event of a military conflict, may be called to active duty. In response to increases in terrorist activity, there have been periods of significant call-ups of military reservists. It is possible that there will be military reserve duty call-ups in the future. Our operations could be disrupted by such call-ups, which may include the call-up of Cell Cure management and other employees. Such disruption could materially adversely affect our business, prospects, financial condition and results of operations.

Cell Cure has received Israeli government grants for certain of its research and development activities. The terms of these grants may require us to seek approvals and to satisfy specified conditions to manufacture products and transfer or license grant-supported technologies outside of Israel. In the context of such approvals, we will be required to pay penalties in addition to the repayment of the grants. Such grants are applied for on a yearly basis and may not be available or only partially granted in the future, which would increase our costs.

Cell Cure has received Israeli government grants for certain of its research and development activities, including grants under the Innovation Law. The terms of these grants require prior approval and the satisfaction of specified conditions to manufacture products and transfer or license technologies outside of Israel. See “Item 1. Business—Grants from Government Entities,” above. For example, the OpRegen program has been supported in part by the IIA through a series of separate research grants, beginning in 2007. As a result, and subject to the requirements of the Innovation Law, we are obligated to pay to the IIA approximately 24.3% of the upfront, milestone, and royalty payments we may receive under the Roche Agreement, up to an aggregate cap on all payments to IIA, such cap growing over time via interest accrual until paid in full, which as of December 31, 2022, currently stands at approximately $91.2 million.

The restrictions under the Innovation Law may impair our ability to enter into any future agreements which involve IIA-funded products or know-how without the approval of IIA, or limit the economic benefit that we might derive under such agreements. We cannot be certain that any approval of IIA will be obtained on terms that are acceptable to us, or at all. We may not receive the required approvals should we wish to transfer or license IIA-funded know-how, manufacturing and/or development outside of Israel in the future. Furthermore, in the event that we undertake a transaction involving the transfer to a non-Israeli entity of know-how developed with IIA-funding pursuant to a merger or similar transaction, the consideration available to our shareholders may be significantly reduced by the amounts we are required to pay to the IIA. Any approval, if given, will generally be subject to additional financial obligations. Failure to comply with the requirements under the Innovation Law may subject Cell Cure to mandatory repayment of grants received by it (together with interest and penalties), as well as expose its directors and management to criminal proceedings. In addition, the IIA may from time-to-time conduct royalty audits. Further grants may not be approved or reduced in the future, which would increase our costs. IIA approval is not required for the marketing or distribution of products resulting from the IIA-funded research or development in the ordinary course of business.

We have relied on grant funding from CIRM to support clinical development of OPC1 and we may not be able to obtain additional CIRM funding, which could negatively impact our operating results and financial condition. In addition, our profits from the sale of products resulting from CIRM-funded development, if any, will be reduced by amounts that we are required to pay CIRM.

The clinical development of OPC1 has been supported by $14.3 million of funding as of the date of this report from CIRM, a state agency established to fund stem cell research and development of new stem cell-based treatments. We intend to apply for additional CIRM grants; however, we cannot provide any assurance that CIRM will have access to additional funds for grants or that any such funding will be awarded to us. If we are unable to obtain another CIRM grant or if the grant funding is insufficient, we may need to raise funds through other mechanisms to continue clinical development of OPC1, which could have a higher cost of capital, cause dilution to our shareholders, restrict our operations or require us to relinquish rights on unfavorable terms. See “Item 1. Business—Grants from Government Entities,” above.

In addition, the terms of our grant award from CIRM require, and we expect the terms of any future grant from CIRM will require, royalty payments to CIRM based on sales of products developed with CIRM funding, if any, which will reduce our profits on sales of such products.

Our international business exposes us to business, regulatory, political, operational, financial and economic risks associated with doing business outside of the United States.

Cell Cure is our 94% owned subsidiary located in Jerusalem, Israel. Currently, all of our cGMP manufacturing processes, including cell banking and product manufacturing for our cell therapy product candidates, are conducted by Cell Cure at its Jerusalem facility. A portion of our OpRegen Phase 1/2a clinical trial has been conducted at sites in Israel. Conducting operations internationally involves a number of risks, including:

• difficulty in staffing and managing foreign operations;
• failure by us to obtain the appropriate regulatory approvals;

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• logistics and regulations associated with shipping drug product or patient samples, including infrastructure conditions and transportation delays;
• financial risks, such as longer payment cycles and exposure to foreign currency exchange rate fluctuations;
• subject to tax on Global Intangible Low Tax Income earned by foreign subsidiaries;
• political and economic instability, including wars, terrorism, and political unrest, outbreak of disease, boycotts, curtailment of trade and other business restrictions;
• multiple, conflicting and changing laws and regulations such as tax laws, export and import restrictions, employment laws, data and privacy laws, regulatory requirements and other governmental approvals, permits and licenses; and
• regulatory and compliance risks that may fall within the purview of the U.S. Foreign Corrupt Practices Act, UK Bribery Act, anti-boycott laws and other anti-corruption laws.

Any of these factors could significantly harm our international operations and, consequently, our results of operations. In addition, any failure to comply with applicable legal and regulatory obligations could impact us in a variety of ways that include, but are not limited to, significant criminal, civil and administrative penalties, including imprisonment of individuals, fines and penalties, denial of export privileges, seizure of shipments, and restrictions on certain business activities. Also, the failure to comply with applicable legal and regulatory obligations could result in the disruption of our clinical trial activities.

Our international operations could be affected by changes in laws, trade regulations, labor and employment regulations, and procedures and actions affecting approval, production, pricing, reimbursement and marketing of tests, as well as by inter-governmental disputes. Any of these changes could adversely affect our business.

Our success internationally will depend, in part, on our ability to develop and implement policies and strategies that are effective in anticipating and managing these and other risks, particularly in Israel. Failure to manage these and other risks may have a material adverse effect on our operations in Israel and on our business as a whole.

The COVID-19 pandemic negatively affected, and it and any other similar public health crisis may in the future have a material adverse effect on, our operations, including the conduct of our clinical trials, as well as the operations of third parties on which we rely.

In March 2020, the World Health Organization declared COVID-19 a global pandemic and the United States declared a national emergency with respect to COVID-19. In response to the COVID-19 pandemic, a number of governmental orders and other public health guidance measures were implemented across much of the United States and Israel, including in the locations of our office and manufacturing facility, clinical trial sites and third parties on which we rely, including quarantines, prohibitions on non-essential operations and gatherings at physical locations, and travel restrictions. The COVID-19 pandemic and actions taken to reduce its spread disrupted our normal course of business operations, including with the implementation of an employee work-from-home policy and travel restrictions, and negatively affected clinical trials of our product candidates. In particular, patient enrollment was delayed in our OpRegen Phase 1/2a clinical trial and the VAC2 Phase 1 clinical trial conducted by Cancer Research UK. Clinical trial sites paused enrollment to focus on, and direct resources to, the COVID-19 pandemic, to adhere to national or local guidelines restricting non-essential operations and gatherings, or in the interest of patient safety. Additionally, some enrolled patients in those trials decided not to participate in follow-up visits on schedule or at all.

Significant uncertainty remains relating to the potential impact of the COVID-19 pandemic, or possible endemic, on the global economy and on our business, operating results and financial condition. As a result of the COVID-19 pandemic, or potentially similar public health crises in the future, and related governmental orders and other public health guidance measures, we may experience business disruptions that could materially and adversely impact our product development programs, business prospects, operating results and financial condition. Potential disruptions might include but are not limited to:

• delays or difficulties in clinical trial site initiation, including difficulties in recruiting clinical site investigators and staff,
• delays or difficulties in enrolling patients or conducting follow-up visits with patients in our clinical trials, particularly patients who may be at higher risk of complications from COVID-19;
• increased rates of patients withdrawing from our clinical trials following enrollment as a result of contracting COVID-19 or other health conditions or being forced to quarantine;
• diversion of healthcare resources away from the conduct of clinical trials, including at hospitals or other facilities serving as our clinical trial sites;
• interruption of key clinical trial activities, such as clinical trial site monitoring, due to limitations on travel;
• limitations on employee or other resources that would otherwise be focused on the conduct of our clinical trials and preclinical work, including because of sickness of employees or their families, the desire of employees to avoid travel or contact with large groups of people, an increased reliance on working from home, school closures or mass transit disruptions;
• manufacturing delays and difficulties for us and our suppliers of raw materials caused by business closures, operational restrictions or labor shortages;
• delays in clinical trial sites receiving the supplies and materials needed to conduct our clinical trials, including interruption in global shipping that may affect the transport of clinical trial materials;
• changes in local regulations as part of a response to the COVID-19 outbreak which may require us to change the ways in which our clinical trials are conducted, which may result in unexpected costs, or to discontinue the clinical trials altogether;
• interruption or delays in the operations of the FDA or other regulatory authorities, including with respect to their manufacturing or clinical trial site inspections, which may impact their ability to timely review and process any submissions we or our collaborators file;
• risk that participants enrolled in our clinical trials will contract COVID-19 or other health conditions while the clinical trial is ongoing, which could impact the results of the clinical trial, including by increasing the number of observed adverse events; and
• refusal of the FDA to accept data from clinical trials in affected geographies.

If patient enrollment or follow-up in our clinical trials is delayed for an extended period of time due to the COVID-19 pandemic or another public health crisis, our clinical trials could be significantly delayed or otherwise adversely affected. Our inability to enroll or follow a sufficient number of patients in our clinical trials could require us to suspend or abandon one or more clinical trials altogether.

In addition, quarantines, shelter-in-place and similar government orders, or the perception that such orders, shutdowns or other restrictions on the conduct of business operations could occur, related to COVID-19 or other infectious diseases could impact personnel at our CROs or third-party suppliers upon which we rely, or the availability or cost of materials necessary to produce our product candidates, which could disrupt the supply chain for our product candidates. To the extent our suppliers and service providers are unable to comply with their obligations under our agreements with them or they are otherwise unable to deliver or are delayed in delivering goods and services to us due to the COVID-19 pandemic, our ability to continue meeting clinical supply demand for our product candidates or otherwise advancing development of our product candidates may become impaired.

The spread of COVID-19 and actions taken to reduce its spread may also materially affect us economically. While the potential economic impact brought by, and the duration of, the COVID-19 pandemic may be difficult to assess or predict, there could be a significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity and financial position. In addition, the trading prices for other biotechnology companies have been volatile as a result of the COVID-19 pandemic. As a result, we may face difficulties raising capital through sales of our common shares or such sales may be on unfavorable terms.

Moreover, many of our office-based employees continue to work remotely at least part of the time, which may negatively impact productivity and exacerbate certain risks to our business, including cybersecurity attacks and data security incidents due to an increase in the number of points of potential attack.

The extent to which COVID-19 may impede the development of our product candidates, reduce the productivity of our employees, disrupt our supply chains, delay our clinical trials, reduce our access to capital, limit our business development activities, or otherwise adversely impact our business, operating results and financial condition or those of third parties on which we rely will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the pandemic, adverse impacts of new coronavirus variants, new information that will emerge concerning the severity of COVID-19, and the actions to contain COVID-19 or treat its impact, among others.

In addition, to the extent the ongoing COVID-19 pandemic adversely affects our business and results of operations, it may also have the effect of heightening many of the other risks and uncertainties described in this ‘‘Risk Factors’’ section.

Our business could be adversely affected if we lose the services of the key personnel upon whom we depend or if we fail to attract senior management and key scientific personnel.

We believe that our continued success depends to a significant extent upon our efforts and ability to retain highly qualified personnel, including our Chief Executive Officer. All of our officers and other employees are at-will employees and may terminate their employment with us at any time with no advance notice. The loss of the services of Mr. Culley or other members of our senior management could have a material adverse effect on us. Further, the replacement of any of such individuals would likely involve significant time and costs and may significantly delay or prevent the achievement of our business and clinical objectives and would harm our business.

In addition, we could experience difficulties attracting qualified employees in the future. For example, competition for qualified personnel in the biotechnology and medical device field is intense due to the limited number of individuals who possess the skills and experience required by our industry. We will need to hire additional personnel as we expand our business, including our clinical development activities. We may not be able to attract quality personnel on acceptable terms, or at all. In addition, to the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited or that they have divulged proprietary or other confidential information or that their former employers own their research output.

Changes in tax laws or regulations that are applied adversely to us or our customers may have a material adverse effect on our business, cash flow, financial condition or results of operations.

New income, sales, use or other tax laws, statutes, rules, regulations or ordinances could be enacted at any time, which could adversely affect our business operations and financial performance. Further, existing tax laws, statutes, rules, regulations or ordinances could be interpreted, changed, modified or applied adversely to us. For example, the Biden administration and Congress have proposed various U.S. federal tax law changes, which if enacted could have a material impact on our business, cash flow, financial condition or results of operations. In addition, it is uncertain if and to what extent various states will conform to the federal tax laws. Future tax reform legislation could have a material impact on the value of our deferred tax assets, could result in significant one-time charges, and could increase our future U.S. tax expense.

Our ability to use net operating losses and other tax attributes to offset future taxable income or taxes may be subject to limitations.

As of December 31, 2022, we had substantial net operating loss (“NOL”) carryforwards for U.S. federal and state tax purposes and other tax attributes to offset future taxable income. However, our federal NOL carryforwards and other tax attributes may not be available to offset future taxable income because of restrictions under U.S. tax law and similar limitations that may apply under state tax laws. A portion of our federal and state NOL carryforwards will begin to expire, if not utilized, in varying amounts between 2027 and 2042. Our federal research and development tax credit carryforwards expire in varying amounts between 2022 and 2042, the California research and development tax credit carryforwards have no expiration date. See Note 13 (Income Taxes) to our consolidated financial statements included in this report for additional information. NOL carryforwards and research and development and other tax credits that expire unused will be unavailable to offset future income tax liabilities. Under federal income tax law, federal NOL carryforwards generated in tax years beginning after December 31, 2017, may be carried forward indefinitely, but the deductibility of such NOL carryforwards is limited to 80% of taxable income. It is uncertain if and to what extent various states that we may operate in will conform to the federal tax law. In addition, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “IRC”), and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50% change, by value, in its equity ownership over a three-year period, the corporation’s ability to use its pre-change NOL carryforwards and other pre-change tax attributes to offset its post-change income or taxes may be limited. We have experienced ownership changes in the past and we may experience ownership changes in the future as a result of subsequent shifts in our stock ownership, some of which may be outside of our control. As a result, our ability to use our pre-change NOL carryforwards and tax credits to offset post-change taxable income, if any, could be subject to significant limitations. Similar provisions of state tax law may also apply. In addition, at the state level, there may be periods during which the use of NOL carryforwards is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed. For example, in 2020, California enacted A.B. 85 which imposed limits on the usability of California state NOL carryforwards and certain tax credits in tax years beginning after 2019 and before 2022. As a result of limitations on our ability to use our NOL carryforwards and tax credits, we may be unable to gain the benefit of a material portion of our NOL carryforwards and tax credits, which could harm our future operating results by effectively increasing our future income tax obligations.

Taxing authorities could reallocate our taxable income among our subsidiaries, which could increase our overall tax liability.

We are organized in the United States, and currently have subsidiaries in Israel and Singapore. If we succeed in growing our business, we expect to conduct increased operations through subsidiaries in various tax jurisdictions pursuant to transfer pricing arrangements between us and our subsidiaries. If two or more affiliated companies are located in different countries, the tax laws or regulations of each country generally will require that such arrangements be priced the same as those between unrelated companies dealing at arm’s length and that appropriate documentation is maintained to support the value of such arrangements. Our transfer pricing policies were formulated with the assistance of third-party experts; however, tax authorities in any country may disagree with our transfer pricing policies and procedures. If tax authorities in any of these countries were to successfully challenge our transfer prices as not reflecting arm’s length transactions, they could require us to adjust our transfer prices and thereby reallocate our income to reflect these revised transfer prices, which could result in a higher tax liability to us. In addition, if the country from which the income is reallocated does not agree with the reallocation, both countries could tax the same income, resulting in double taxation. If tax authorities were to allocate income to a higher tax jurisdiction, subject our income to double taxation or assess interest and penalties, it would increase our tax liability, which could adversely affect our financial condition, results of operations and cash flows.

Because a portion of our expenses are incurred in currencies other than the U.S. Dollar, our results of operations may be harmed by currency fluctuations.

Our reporting and functional currency is the United States Dollar, but a material portion of our research and development and other operating expenses are incurred in Israeli New Shekels through our subsidiary Cell Cure. As a result, we are exposed to some currency fluctuation risks. Fluctuation in the exchange rate of the foreign currency has an influence on and may adversely affect our comprehensive loss and cash flows.

Risks Related to Government Regulation

We may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws, including anti-kickback and false claims laws, transparency laws, and health information privacy and security laws. If we are unable to comply, or have not fully complied, with such laws, we could face substantial penalties.

Our current and future operations may be subject to various federal and state fraud and abuse laws, including, without limitation, the federal Anti-Kickback Statute, the federal False Claims Act, and healthcare professional transparency laws and regulations. These laws may impact, among other things, our research activities and our proposed sales, marketing, and education programs. In addition, we may be subject to patient privacy regulation by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include:

• the federal Anti-Kickback Statute, which prohibits, among other things, persons and entities from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, to induce, or in return for, the purchase or recommendation of an item or service reimbursable under a federal healthcare program, such as the Medicare and Medicaid programs;
• federal civil and criminal false claims laws, including the federal False Claims Act, and civil monetary penalty laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent;
• HIPAA, which created new federal criminal statutes that prohibit, among other things, executing a scheme to defraud any healthcare benefit program and making false statements relating to healthcare matters;
• HIPAA, as amended by HITECH and their implementing regulations, which imposes certain requirements on “covered entities,” including certain healthcare providers, health plans, and healthcare clearinghouses, as well as their respective “business associates” that create, receive, maintain or transmit individually identifiable health information for or on behalf of a covered entity, and their subcontractors that use, disclose, access, or otherwise process individually identifiable protected health information, relating to the privacy, security, and transmission of individually identifiable health information;
• The Physician Payments Sunshine Act which requires manufacturers of drugs, devices, biologics, and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to the CMS, information related to payments and other transfers of value to physicians (defined to include doctors, dentists, optometrists, podiatrists, and chiropractors), certain other healthcare professionals (such as physician assistants and nurse practitioners), and teaching hospitals, and ownership and investment interests held by physicians and their immediate family members and applicable group purchasing organizations; and
• state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws that may apply to items or services reimbursed by any third-party payors, including commercial insurers, state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government, or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; state laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers, marketing expenditures, or drug pricing, state and local laws that require the registration of pharmaceutical sales representatives, and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.

Because of the breadth of these laws and the narrowness of the statutory exceptions and regulatory safe harbors available, it is possible that some of our business activities could be subject to challenge under one or more of such laws. In addition, recent healthcare reform legislation has strengthened these laws.

If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply, we may be subject to significant penalties, including administrative, civil and criminal penalties, damages, fines, disgorgement, exclusion from participation in government healthcare programs, such as Medicare and Medicaid, integrity oversight and reporting obligations, imprisonment, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations.

If we do not receive regulatory approvals, we will not be permitted to sell our product candidates.

Our investigational cell therapies cannot be marketed or sold until the FDA and corresponding foreign regulatory authorities approve the products for the human medical applications for which they are being developed. In addition, the regulatory approval process for novel product candidates such as ours can be more complex and consequently more expensive and take longer than for other, better known or extensively studied pharmaceutical or other product candidates. The need to obtain regulatory approval to market a new product means that:

• We will have to conduct expensive and time-consuming clinical trials of new products. The full cost of conducting and completing clinical trials necessary to obtain FDA and foreign regulatory approval of a new product cannot be presently determined but could exceed our current financial resources.
• Clinical trials and the regulatory approval process for a pharmaceutical or cell-based product can take several years to complete. As a result, we will incur the expense and delay inherent in seeking FDA and foreign regulatory approval of new products, even if the results of clinical trials are favorable.
• Data obtained from preclinical and clinical studies is susceptible to varying interpretations and regulatory changes that could delay, limit, or prevent regulatory agency approvals.
• Because the therapeutic products we are developing with pluripotent stem cell technology involve the application of new technologies and approaches to medicine, the FDA or foreign regulatory agencies may subject those products to additional or more stringent review than drugs or biologics derived from other technologies.
• A product that is approved may be subject to restrictions on use.
• The FDA can recall or withdraw approval of a product, if it deems necessary.
• We will face similar regulatory issues in foreign countries.

Government-imposed bans or restrictions and religious, moral, and ethical concerns about the use of hES cells could prevent us from developing and successfully marketing stem cell products.

Government-imposed bans or restrictions on the use of embryos or hES cells in research and development in the United States and abroad could generally constrain stem cell research, thereby limiting the market and demand for our products. During March 2009, the federal government, pursuant to a presidential executive order, lifted certain restrictions on federal funding of research involving the use of hES cells, and in accordance with the executive order, the NIH has adopted guidelines for determining the eligibility of hES cell lines for use in federally funded research. The central focus of the guidelines is to assure that hES cells used in federally funded research were derived from human embryos that were created for reproductive purposes, were no longer needed for this purpose, and were voluntarily donated for research purposes with the informed written consent of the donors. The hES cells that were derived from embryos created for research purposes rather than reproductive purposes, and other hES cells that were not derived in compliance with the guidelines, are not eligible for use in federally funded research. California law requires that stem cell research be conducted under the oversight of a SCRO Committee. Many kinds of stem cell research, including the derivation of new hES cell lines, may only be conducted in California with the prior written approval of the SCRO Committee. A SCRO Committee could prohibit or impose restrictions on the research that we plan to do. The use of hES cells may give rise to religious, moral, and ethical issues. These considerations could lead to more restrictive government regulations or could generally constrain stem cell research, thereby limiting the market and demand for our products.

Some of our product candidates, may be considered combination products by the FDA and other regulatory authorities, which could increase the complexity, cost and timeline for their development and regulatory approval.

To the extent our product candidates meet the FDA’s or other regulatory authority’s definition of a combination product, the regulatory approval requirements can be more complex because in addition to the individual regulatory requirements for each component, e.g., a biologic and a medical device, additional combination product regulatory requirements may apply. The cost and timeline for development of any of our cell therapy product candidates determined to be a combination product may be substantially greater than that of other product candidates.

We expect that the commercial opportunity for some of our products may depend on our ability, or that of a commercial collaborator, to obtain and maintain reimbursement and continued coverage from various payors, including government agencies and insurance companies.

If these third-party payors do not consider our products to be cost-effective compared to other therapies, they may not cover our products as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our products on a profitable basis.

For example, in the United States, healthcare providers are reimbursed for covered services and products they deliver through Medicare, Medicaid and other government healthcare programs, as well as through private payers. No uniform policy for coverage and reimbursement exists in the United States, and coverage and reimbursement can differ significantly from payor to payor. Decisions regarding whether to cover any of our product candidates, if approved, the extent of coverage and amount of reimbursement to be provided are made on a plan-by-plan basis. Third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement rates, but also have their own methods and approval process apart from Medicare determinations. As a result, the coverage determination process is often a time-consuming and costly process that will require us to provide scientific and clinical support for the use of our product candidates to each payor separately, with no assurance that coverage and adequate reimbursement will be applied consistently or obtained in the first instance. We may be required to provide specified rebates or discounts on the products we sell to certain government funded programs, including Medicare and Medicaid, and those rebates or discounts have increased over time. The Patient Protection and Affordable Care Act, as amended by the Healthcare and Education Reconciliation Act (collectively, the “ACA”), enacted in 2010, increased many of the mandatory discounts and rebates and imposed a new branded prescription pharmaceutical manufacturers and importers fee payable each year by certain manufacturers.

If we are unable to establish or sustain coverage and adequate reimbursement for any product candidates from third-party payors, the adoption of those products and sales revenue will be adversely affected, which, in turn, could adversely affect the ability to market or sell those product candidates, if approved. Further, coverage policies and third-party payor reimbursement rates may change at any time. Therefore, even if favorable coverage and reimbursement status is attained, less favorable coverage policies and reimbursement rates may be implemented in the future.

We face similar issues outside of the United States. In some non-U.S. jurisdictions, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug pricing vary widely from country to country. For example, the EU provides options for its member states to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. A member state may approve a specific price for the medicinal product, or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our products. Historically, products launched in the EU do not follow price structures of the United States and generally tend to be significantly lower.

Legislation and legislative and regulatory proposals intended to contain health care costs may adversely affect our business.

There has been heightened governmental scrutiny in the United States of pharmaceutical pricing practices in light of the rising cost of prescription drugs and biologics. As an example, in August 2022, Congress passed the Inflation Reduction Act of 2022, which includes prescription drug provisions that have significant implications for the pharmaceutical industry and Medicare beneficiaries, including allowing the federal government to negotiate a maximum fair price for certain high-priced single source Medicare drugs, imposing penalties and excise tax for manufacturers that fail to comply with the drug price negotiation requirements, requiring inflation rebates for all Medicare Part B and Part D drugs, with limited exceptions, if their drug prices increase faster than inflation, and redesigning Medicare Part D to reduce out-of-pocket prescription drug costs for beneficiaries, among other changes. Further, the Biden administration released an additional executive order on October 14, 2022, the U.S. Department of Health & Human Services to submit a report within 90 days on how the Center for Medicare and Medicaid Innovation can be further leveraged to test new models for lowering drug costs for Medicare and Medicaid beneficiaries. It is unclear whether this executive order or similar policy initiatives will be implemented in the future. The impact of these legislative, executive, and administrative actions and any future healthcare measures and agency rules implemented on the pharmaceutical industry as a whole is unclear. The implementation of cost containment measures, including the prescription drug provisions under the Inflation Reduction Act, as well as other healthcare reforms may prevent us from being able to generate revenue, attain profitability, or commercialize our product candidates if approved.

Disruptions at the FDA and other government agencies caused by funding shortages or other events or conditions outside of their control could negatively impact our business.

The ability of the FDA to review and approve proposed clinical trials or new product candidates can be affected by a variety of factors, including, but not limited to, government budget and funding levels, ability to hire and retain key personnel and accept the payment of user fees, statutory, regulatory, and policy changes, and other events that may otherwise affect the FDA’s ability to perform routine functions. Average review times at the agency have fluctuated in recent years as a result. In addition, government funding of other government agencies that fund research and development activities is subject to the political process, which is inherently fluid and unpredictable.

Disruptions at the FDA and other agencies may also slow the time necessary for new product candidates to be reviewed and/or approved by necessary government agencies, which would adversely affect our business. For example, as a result of the COVID-19 pandemic, the FDA’s inspectional activities were interrupted and restarted on a risk-based basis, which had the effect of delaying review and potential approval of product candidate marketing applications. In addition, over the last several years, including for 35 days beginning on December 22, 2018, the U.S. government has shut down several times and certain regulatory agencies, such as the FDA, have had to furlough critical FDA employees and stop various activities.

The ACA and future changes to that law may adversely affect our business.

As a result of the adoption of the ACA, in the United States, substantial changes have been made to the system for paying for healthcare in the United States. Among the ACA’s provisions of importance to our industry are that it:

• created the branded prescription pharmaceutical manufacturers and importers annual fee;
• increased the statutory minimum rebates a manufacturer must pay under the Medicaid Drug Rebate Program, to 23.1% and 13% of the average manufacturer price for most branded and generic drugs, respectively and capped the total rebate amount for innovator drugs at 100% of the Average Manufacturer Price. However, on March 11, 2021, President Biden signed the American Rescue Plan Act of 2021 into law, which eliminates the statutory Medicaid drug rebate cap for single source and innovator multiple source drugs, beginning January 1, 2024;
• created new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for certain drugs and biologics that are inhaled, infused, instilled, implanted or injected;

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• extended manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care organizations;
• expanded eligibility criteria for Medicaid programs by, among other things, allowing states to offer Medicaid coverage to additional individuals and by adding new mandatory eligibility categories for individuals with income at or below 133% of the federal poverty level, thereby potentially increasing manufacturers’ Medicaid rebate liability;
• expanded the entities eligible for discounts under the Public Health program;
• created a new Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along with funding for such research;
• established a Center for Medicare & Medicaid Innovation at CMS to test innovative payment and service delivery models to lower Medicare and Medicaid spending, potentially including prescription drug spending; and
• created a licensure framework for follow on biologic products.

There have been executive, judicial and Congressional challenges to certain aspects of the ACA. While Congress has not passed comprehensive repeal legislation, it has enacted laws that modify certain provisions of the ACA such as removing penalties for not complying with the ACA’s individual mandate to carry health insurance, and eliminating the implementation of certain ACA-mandated fees. In June 2021, the United States Supreme Court dismissed a challenge on procedural grounds that argued the ACA is unconstitutional in its entirety because the “individual mandate” was repealed by Congress. Thus, the ACA will remain in effect in its current form. Moreover, prior to the United States Supreme Court ruling, in January 2021, President Biden issued an executive order that, among other things, instructed certain governmental agencies to review and reconsider their existing policies and rules that limit access to healthcare, including among others, reexamining Medicaid demonstration projects and waiver programs that include work requirements, and policies that create unnecessary barriers to obtaining access to health insurance coverage through Medicaid or the ACA. It is possible that the ACA will be subject to judicial or Congressional challenges in the future. It is unclear how any such challenges, other litigation, and the healthcare reform measures of the Biden administration will impact the ACA.

In addition, other legislative changes have been proposed and adopted since the ACA was enacted. For example, the Budget Control Act of 2011, includes reductions to Medicare payments to providers of 2% per fiscal year, which went into effect on April 1, 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2031, with the exception of a temporary suspension from May 1, 2020 through March 31, 2022, unless additional Congressional action is taken. Under current legislation, the actual reduction in Medicare payments will vary from 1% in 2022 to up to 3% in the final fiscal year of this sequester. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, reduced Medicare payments to several providers, including hospitals, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years. Additionally, Congress is considering additional health reform measures.

Further, there has been heightened governmental scrutiny in the United States of pharmaceutical pricing practices in light of the rising cost of prescription drugs and biologics. Such scrutiny has resulted in several recent presidential executive orders, congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for products. At the federal level, the Trump administration used several means to propose or implement drug pricing reform, including through federal budget proposals, executive orders and policy initiatives. For example, in 2020 the Trump administration announced several executive orders related to prescription drug pricing that attempted to implement several of the administration’s proposals. As a result, the FDA concurrently released a final rule and guidance in September 2020, providing pathways for states to build and submit importation plans for drugs from Canada. Further, in November 2020, the U.S. Department of Health & Human Services (“HHS”) finalized a regulation removing safe harbor protection for price reductions from pharmaceutical manufacturers to plan sponsors under Medicare Part D, either directly or through pharmacy benefit managers, unless the price reduction is required by law. The implementation of the rule has been delayed until 2032 by the Inflation Reduction Act of 2022. The rule also creates a new safe harbor for price reductions reflected at the point-of-sale, as well as a new safe harbor for certain fixed fee arrangements between pharmacy benefit managers and manufacturers, the implementation of which has been delayed until 2032 by the Inflation Reduction Act of 2022. On November 20, 2020, CMS issued an interim final rule implementing President Trump’s Most Favored Nation executive order, which would tie Medicare Part B payments for certain physician-administered drugs to the lowest price paid in other economically advanced countries. The Most Favored Nation regulations mandate participation by identified Medicare Part B providers and will apply in all U.S. states and territories for a seven-year period beginning January 1, 2021, and ending December 31, 2027. As a result of litigation challenging the Most Favored Nation model, in December 2021, CMS published a final rule that rescinds the Most Favored Nation model interim final rule. Further, in July 2021, the Biden administration released an executive order that included multiple provisions aimed at prescription drugs. In response to President Biden’s executive order, in September 2021, the HHS released a Comprehensive Plan for Addressing High Drug Prices that outlines principles for drug pricing reform. The plan sets out a variety of potential legislative policies that Congress could pursue as well as potential administrative actions HHS can take to advance these principles. No legislation or administrative actions have been finalized to implement these principles. Additionally, based on a recent executive order, the Biden administration expressed its intent to pursue certain policy initiatives to reduce drug prices. At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and, in some cases, designed to encourage importation from other countries and bulk purchasing.

In addition, it is possible that additional governmental action is taken in response to the COVID-19 pandemic.

If we fail to comply with the extensive legal and regulatory requirements affecting the healthcare industry, we could face increased costs, penalties and loss of business.

Our activities, and the activities of our collaborators, distributors and other third-party providers, are subject to extensive government regulation and oversight both in the U.S. and in foreign jurisdictions. The FDA and comparable agencies in other jurisdictions will directly regulate many of our most critical business activities, including the conduct of preclinical and clinical studies, product manufacturing, future advertising and promotion, product distribution, adverse event reporting and product risk management. Our current and future interactions in the U.S. or abroad with physicians and other healthcare providers that may prescribe or purchase our products once commercialized are also subject to government regulation designed to prevent fraud and abuse in the sale and use of the products and place greater restrictions on the marketing practices of healthcare companies. Healthcare companies are facing heightened scrutiny of their relationships with healthcare providers from anti-corruption enforcement officials. In addition, healthcare companies have been the target of lawsuits and investigations alleging violations of government regulation, including claims asserting submission of incorrect pricing information, impermissible off-label promotion of pharmaceutical products, payments intended to influence the referral of healthcare business, submission of false claims for government reimbursement, antitrust violations or violations related to environmental matters. Risks relating to compliance with laws and regulations may be heightened as we bring products to the market globally.

Regulations governing the healthcare industry are subject to change, with possibly retroactive effect, including:

• new laws, regulations or judicial decisions, or new interpretations of existing laws, regulations or decisions, related to healthcare availability, pricing or marketing practices, compliance with wage and hour laws and other employment practices, method of delivery, payment for healthcare products and services, compliance with health information and data privacy and security laws and regulations, tracking and reporting payments and other transfers of value made to physicians and teaching hospitals, extensive anti-bribery and anti-corruption prohibitions, product serialization and labeling requirements and used product take-back requirements;
• changes in the FDA and foreign regulatory approval processes that may delay or prevent the approval of new products and result in lost market opportunity;

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• requirements that provide for increased transparency of clinical trial results and quality data, such as the EMA’s clinical transparency policy, which could impact our ability to protect trade secrets and competitively sensitive information contained in approval applications or could be misinterpreted leading to reputational damage, misperception or legal action which could harm our business; and
• changes in FDA and foreign regulations that may require additional safety monitoring, labeling changes, restrictions on product distribution or use, or other measures after the introduction of our products to market, which could increase our costs of doing business, adversely affect the future permitted uses of approved products, or otherwise adversely affect the market for our products.

Violations of governmental regulation may be punishable by criminal and civil sanctions against us, including fines and civil monetary penalties and exclusion from participation in government programs, including Medicare and Medicaid, as well as against executives overseeing our business. In addition to penalties for violation of laws and regulations, we could be required to repay amounts we received from government payors or pay additional rebates and interest if we are found to have miscalculated the pricing information we have submitted to the government. We cannot ensure that our compliance controls, policies and procedures will in every instance protect us from acts committed by our employees, collaborators, partners or third-party providers that would violate the laws or regulations of the jurisdictions in which we operate. Whether or not we have complied with the law, an investigation into alleged unlawful conduct could increase our expenses, damage our reputation, divert management time and attention and adversely affect our business.

Even if we receive approval to market a product candidate, we may be subject to extensive post-approval regulatory obligations that may have a significant adverse effect on our business, results of operations, financial condition and reputation.

Even after initial FDA or foreign regulatory agency approval has been obtained, further studies may be required to provide additional data on safety or to gain approval for the use of a product as a treatment for clinical indications other than those initially targeted. Use of a product during testing and after marketing could reveal side effects that could delay, impede, or prevent marketing approval, result in a regulatory agency-ordered product recall, or in regulatory agency-imposed limitations on permissible uses or in withdrawal of approval. For example, if the FDA or foreign regulatory agency becomes aware of new safety information after approval of a product, it may require us to conduct further clinical trials to assess a known or potential serious risk and to assure that the benefit of the product outweigh the risks. If we are required to conduct such a post-approval study, periodic status reports must be submitted to the FDA or foreign regulatory agency. Failure to conduct such post-approval studies in a timely manner may result in substantial civil or criminal penalties. Data resulting from these clinical trials may result in expansions or restrictions to the labeled indications for which a product has already been approved. Any of these requirements or actions may negatively impact our business or operations.

The FDA has granted orphan drug designation to OPC1 for the treatment of acute spinal cord injuries, but there is no guarantee we will be able to maintain orphan drug designation or obtain the benefits associated with orphan drug designation, including marketing exclusivity.

We have orphan drug designation from the FDA for OPC1 for the treatment of acute spinal cord injuries. As discussed in more detail in Item 1. “Business—Government Regulation—FDA and Foreign Regulation of Therapeutic Products,” above, generally, if a biologic with orphan drug designation from the FDA subsequently receives the first marketing approval for the indication for which it has such designation, the product is entitled to seven years of marketing exclusivity in the United States. Other benefits of an orphan drug designation may include a waiver of the marketing application fee. However, the orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review or approval process.

Orphan drug designation may not effectively protect OPC1 from competition because different drugs or biologics can be approved for the same indication and only the first biologic with an orphan drug designation to receive FDA approval for the treatment of acute spinal cord injuries will receive marketing exclusivity. OPC1 may not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation. In addition, exclusive marketing rights in the United States may be lost if the FDA later determines that our request for orphan drug designation was materially defective or if we are unable to assure sufficient quantities of the commercial product to meet the needs of patients with acute spinal cord injuries.

Risks Related to Our Clinical Development and Commercial Operations

Clinical development of new therapeutic products is a lengthy and expensive process with a high level of uncertainty as to timing and ultimate outcome.

Clinical and nonclinical development of new therapeutic products is expensive and can take many years to complete, and its outcome and timing are inherently uncertain. Our clinical trials may not be conducted as planned or completed on schedule, if at all, and failure can occur at any time during the development process. There is typically an extremely high rate of attrition from the failure of product candidates proceeding through clinical trials, and cell therapy is a relatively new field, which may heighten the risk of failure. Events that may prevent successful or timely completion of clinical development of our product candidates include, but are not limited to:

• inability to generate satisfactory preclinical, toxicology, or other in vivo or in vitro data or diagnostics to support the initiation or continuation of clinical studies necessary for product approval;
• delays in identifying, developing or securing rights to use, and testing delivery systems or other methods for administration of our potential cell therapies;
• delays in securing clinical investigators and agreeing on acceptable terms with contract research organizations (“CROs”) and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among CROs and clinical trial sites;
• delays in obtaining required institutional review board (“IRB”) or ethics committee (“EC”) approval at each clinical trial site;
• failure obtaining permission from regulatory authorities to conduct a clinical trial after review of an IND or equivalent foreign application or amendment;
• slower than anticipated rates of patient recruitment and enrollment (including as a result of actual or threatened public health emergencies and outbreaks of disease such as the COVID-19 pandemic), or failure to reach the targeted number of study participants due to competition from other clinical trials or available treatment options (some potentially newly approved and marketed), or patients dropping out of our clinical studies once enrolled;
• failure by clinical sites or our CROs or other third parties to adhere to clinical trial requirements or report complete findings;
• failure to perform the clinical studies in accordance with the FDA’s good clinical practices requirements or applicable foreign regulatory guidelines;
• occurrence of serious adverse events (“SAEs”) or adverse events (“AEs”) associated with our product candidates or with product candidates of third parties that may have characteristics similar to or perceived to be similar to our product candidates;
• negative or inconclusive results from our clinical trials or clinical trials of others for product candidates similar to ours, which may result in our deciding, or regulators requiring us, to conduct additional clinical studies or to curtail or abandon development programs for a product candidate;
• inadequate effectiveness or unacceptable side effects, possibly resulting in the FDA or other regulatory authorities denying approval of our product candidates;
• approval and introduction of new therapies or changes in standards of practice or regulatory guidance that render our clinical trial endpoints or the targeting of our proposed indications obsolete;

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• inability to monitor patients adequately during or after treatment or problems with patient compliance with the clinical trial protocols;
• inability or unwillingness of medical investigators to follow our clinical trial protocols;
• inadequate supply or quality of clinical trial materials or other supplies necessary for the conduct of our clinical trials;
• delayed or unfavorable FDA or other regulatory agency inspection and review of a clinical trial site or a manufacturing facility;
• inability to use clinical trial results from foreign jurisdictions to support U.S. regulatory approval;
• changes in regulatory requirements and guidance that require amending clinical trial protocols or conducting additional clinical or nonclinical studies; and
• greater than anticipated cost of clinical studies of our product candidates.

If patients drop out of our clinical trials, miss scheduled doses or follow-up visits or otherwise fail to follow clinical trial protocols, or if our clinical trials are otherwise disrupted due to unforeseen events, such as previously occurred as a result of the COVID-19 pandemic as discussed elsewhere in this Risk Factors section, the integrity of data from our clinical trials may be compromised or not accepted by the FDA or other regulatory authorities, which would represent a significant setback for the applicable program.

Delays or any inability to successfully complete clinical development and obtain regulatory approval could result in additional costs to us, impair our ability to generate revenue and harm our financial condition. Clinical trial delays could also shorten any periods during which our products have patent protection and may allow competitors to develop and bring products to market before we do and may harm our prospects and results of operations.

The results of preclinical studies and early clinical trials of our product candidates are not necessarily predictive of future results. Our product candidates may not have favorable results in later clinical trials despite positive results in preclinical and early clinical studies, which may have a material and adverse effect on our business and financial condition.

All of our product candidates will require substantial additional development, and no assurances can be given that the development of any of our product candidates will ultimately be successful. Results from preclinical testing and clinical studies of our product candidates, may support continued development and we may spend significant time and resources on development of a potential product based on results of such early studies, but product candidates in later stages of development may fail to demonstrate safety and efficacy results necessary for regulatory approval or commercial viability. Many companies in our industry have suffered significant setbacks in advanced clinical trials due to lack of efficacy, insufficient durability of efficacy or unacceptable safety issues, notwithstanding promising results in earlier trials. Most product candidates that commence clinical trials are never approved as products. A failure of one or more clinical studies can occur at any stage of development, including in a post-approval study.

In later clinical studies, our product candidates may not demonstrate the efficacy, durability of efficacy, or safety achieved in preclinical and earlier clinical studies for a variety of reasons, including:

• our efforts to improve, standardize, and scale up the manufacture of our clinical product candidates, including OpRegen, OPC1, and VAC2, and any resulting changes to the product candidates, may adversely affect the safety, purity, potency or efficacy of such product candidates;
• differences in delivery systems or other methods of transplant or administration of our cell formulations;
• differences in trial design, including number of subjects, controls (type and number), eligibility criteria, patient populations, and endpoints;

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• advancements in the standard of care, including newly approved and/or marketed products, may affect our ability to demonstrate efficacy or achieve trial endpoints in our current or future clinical trials; and
• variability in interpretation and analysis of study data.

For example, based on data analyzed to date, in our Phase 1/2a open-label trial for OpRegen, OpRegen has been well tolerated and demonstrated an acceptable safety profile, with no unexpected adverse events, while having qualifiable and quantifiable therapeutic potential in patients with geographic atrophy secondary to age-related macular degeneration. However, positive data from the Phase 1/2a trial are not necessarily predictive of results that may be seen from the Phase 2a clinical trial that Roche launched in late 2022. We do not know how OpRegen will perform in that Phase 2a trial or future clinical trials.

Additional clinical trials of our product candidates, which may include registrational trials, trials in additional patient populations or under different treatment conditions, and trials using different manufacturing protocols, processes, materials or facilities or under different manufacturing conditions, will be necessary before we or our collaborators are able to seek approvals for our product candidates from the FDA and regulatory authorities outside the United States to market and sell these product candidates. Our failure, or that of our collaborators, to meet the requirements to support marketing approval for our product candidates in ongoing and future clinical trials would substantially harm our business and prospects. If clinical trials of our product candidates are not successful, our business, financial condition and results of operations could be materially harmed, and the price of our common shares may decline significantly following announcement of an unsuccessful clinical trial.

Interim, topline and preliminary data from clinical trials of our product candidates that we or our collaborators publicly disclose from time to time may change as more patient data become available and are subject to audit and verification procedures that could result in material changes in the final data.

From time to time, we or collaborators conducting clinical trials of our product candidates may publicly disclose interim, preliminary or topline data from those clinical trials, which is based on a preliminary analysis of then-available data, and the results and related findings and conclusions are subject to change following a more comprehensive review of the data related to the particular trial. We also make assumptions, estimations, calculations and conclusions as part of our analyses of data, and we may not have received or had the opportunity to fully and carefully evaluate all data. As a result, preliminary and topline results reported for clinical trials of our product candidates may differ from final results of the same studies, or different conclusions or considerations may qualify such results, once additional data have been received and fully evaluated. Such data also remain subject to audit and verification procedures that may result in the final data being materially different from the preliminary data we previously disclosed. As a result, preliminary and topline data should be viewed with reservation until the final data are available. From time to time, we may also disclose interim data from our clinical trials. Interim data from clinical trials that we may complete are subject to the risk that one or more of the clinical outcomes may materially change as patient enrollment continues and more patient data become available. Adverse differences between preliminary, topline or interim data and final data could significantly harm our business prospects.

Further, others, including regulatory agencies, may not accept or agree with our assumptions, estimates, calculations, conclusions or analyses or may interpret or weigh the importance of data differently, which could impact the value of the particular program, the approvability or commercialization of the particular product candidate or product and our company in general. In addition, the information we choose to publicly disclose regarding a particular trial is based on what is typically extensive information, and you or others may not agree with what we determine is the material or otherwise appropriate information to include in our disclosure, and any information we determine not to disclose may ultimately be deemed significant with respect to future decisions, conclusions, views, activities or otherwise regarding a particular product candidate or our business. If the topline data that we report differ from actual results, or if others, including regulatory authorities, disagree with the conclusions reached, our ability to obtain approval for, and commercialize, our product candidates may be harmed, which could harm our business, operating results, prospects or financial condition.

The manufacture of our cell therapy product candidates is complex, highly regulated and subject to a multitude of risks. We have limited experience manufacturing our product candidates on a clinical scale and no experience manufacturing on a commercial scale. Any failure by us or any third party on which we may depend to manufacture our product candidates in sufficient quantities in accordance with our quality standards and regulatory requirements and at acceptable costs, may result in significant clinical development delays or impair our ability, or that of a strategic collaborator, to obtain approval for or commercialize our product candidates.

The manufacture and supply of our cell therapy product candidates involve novel processes that are generally more complex than those required for small molecule drugs and accordingly present significant challenges and are subject to multiple risks. These complex processes involve the expansion and differentiating of the pluripotent cells to obtain the desired cell product candidate. Manufacturing our product candidates requires significant expertise and capital investment, including in the development and validation of advanced manufacturing techniques and specific quality assurance and quality control procedures. As a result of the complexities involved, the cost to manufacture human cell-based biologics is generally higher than for traditional therapies or vaccines and the manufacturing process is less reliable and more difficult to reproduce. In addition, our cost of goods development is at an early stage. The actual cost to manufacture and supply our product candidates could be greater than we expect and could materially and adversely affect the commercial viability of our product candidates. Excessive manufacturing costs could make our product candidates too expensive to compete with alternative products or therapies, or might result in third-party payors declining to cover our products or setting coverage levels too low for us to earn a profit from the commercialization of one or more of our products.

We intend to manufacture all of the clinical supply of our cell therapy product candidates for ongoing and planned clinical trials. We will need to scale up our manufacturing operations, as we do not currently have the infrastructure or capability to manufacture sufficient quantities of each of our product candidates to support commercialization, if approved. Currently, as described elsewhere in this Risk Factors section, we are entirely dependent on our subsidiary Cell Cure and its manufacturing facility located in Israel for the manufacture and supply of our cell therapy product candidates. While that facility is designed and equipped to enable simultaneous cGMP processes and to produce a range of human cell therapy products for use in clinical trials, as well as at a scale suitable for commercial launch, we will need greater manufacturing capacity to support commercial development of all our product candidates. If we do not have sufficient capital to increase our internal manufacturing capabilities, we may need to rely on third-parties to manufacture and supply any products we develop and there is no assurance that we would be able to identify third parties capable of manufacturing our product candidates on acceptable terms or at all.

We are still developing optimized and reproducible manufacturing processes for clinical and commercial-scale manufacturing of our product candidates. To date, we have not scaled the manufacturing processes with respect to any of our product candidates for commercialization. None of our manufacturing processes have been validated for commercial production of our product candidates. We may face multiple challenges as we scale up our manufacturing operations and, ultimately, we may not be successful as to one or more of our product candidates. These challenges include, among others, cost overruns, potential problems with process scale-up, process reproducibility, stability and purity issues, compliance with cGMP and cGTP, lot consistency and timely availability and quality of acceptable reagents and raw materials. In addition, we are continuing to optimize our protocols for the supply and transport of our product candidates for distribution to clinical trial sites. Although we are working to develop reproducible and commercially viable manufacturing processes for our product candidates, and effective protocols for the supply and transport of our product candidates, doing so is a difficult and uncertain task. If we are unable to scale production to the level required for commercialization, we may not be able to meet the requirements for the potential commercial launch or to meet potential future demand if any product candidates are approved for commercialization, which would have an adverse effect on our business, financial condition, results of operations and growth prospects.

The manufacturing processes for any products that we may develop and the facilities used to manufacture our product candidates are subject to FDA and foreign regulatory authority approval requirements, and we will need to meet, and any third party manufacturers we may rely on the future will need to meet, all applicable FDA and foreign regulatory authority requirements on an ongoing basis. We cannot provide assurance that the manufacturing processes that we use, or the technologies that we incorporate into these processes, will result in viable or scalable yields of our cell therapy product candidates that will be safe and effective. We may be required to identify alternative protocols, processes, raw materials, or facilities for the manufacture of any of our product candidates in compliance with applicable regulatory requirements. In addition, we may be required to increase our safety testing protocols for our product candidates. Any modifications to our manufacturing and supply protocols, processes, safety testing, materials or facilities, and any delays in, or inability to, establish acceptable manufacturing and supply operations for our product candidates could require us to incur substantial additional development costs or result in significant delays to our clinical development. If we, or any third-party manufacturer we may rely on in the future, are unable to reliably produce products to specifications acceptable to the FDA or other regulatory authorities, we may not obtain or maintain the regulatory approvals we need to commercialize our product candidates. Even if we obtain regulatory approval for any product candidates, there is no assurance that either we or any future third-party manufacturer will be able to manufacture the approved product to specifications acceptable to the FDA or other regulatory authorities, to produce it in sufficient quantities and on the requisite timelines to meet the requirements for the potential launch of the product, or to meet potential future demand. Additionally, changes in regulatory requirements may require us or our third-party manufacturers to perform additional studies or to modify protocols, processes, materials or facilities for the manufacture of our product candidates or any components thereof. Any of these challenges could delay initiation or completion of clinical trials, require bridging clinical trials or the repetition of one or more clinical trials, increase clinical trial costs, delay approval of our product candidates, impair commercialization efforts, increase our cost of goods, and have an adverse effect on our business, financial condition, results of operations and prospects.

Changes in or disruptions to our manufacturing operations could materially and adversely affect our business.

We may have to make changes to our manufacturing operations or processes at various points during development, before or after commercialization, for various reasons, such as to control costs, achieve scale, decrease processing time, increase manufacturing success rate, or for other reasons. Such changes, even seemingly minor changes, carry the risk that they will not achieve their intended objectives, and any of these changes could cause our product candidates to perform differently and affect the results of any of our then-ongoing clinical trials or future clinical trials, or the performance of the product. In certain circumstances, if we make changes to our manufacturing operations or process for a product candidate, the FDA or foreign regulatory authorities may require us to perform comparability studies and collect additional preclinical or clinical data prior to undertaking additional clinical trials or obtaining marketing approval for the product candidate, or if already on the market, prior to supplying any product produced with such modified process. For instance, if we make changes to our manufacturing process for a product candidate during the course of clinical development, regulatory authorities may require us to show the comparability of the product used in earlier clinical phases or earlier portions of a trial to the product used in later clinical phases or later portions of the trial. We may be unable to successfully generate comparability data, and even if we are able to generate and provide such data, regulatory authorities may determine that the data are insufficient to support a determination of comparability which would result in additional testing, and could result in manufacturing delays and affect our ability to timely commence or complete clinical trials of our product candidate, which could delay further development or commercialization of such product candidate and may increase our development costs substantially.

Currently, as described elsewhere in this Risk Factors section, we are entirely dependent on our subsidiary Cell Cure and its manufacturing facility located in Israel for the manufacture and supply of our cell therapy product candidates, and events or conditions that disrupt operations at that facility could materially and adversely affect our business. In 2022, we announced the opening of a new research and development facility in Carlsbad, California to support the development of current and future allogeneic cell transplant programs. Utilization of this new facility for cGMP manufacturing of our product candidates will require significant additional investment, including hiring and retaining additional experienced scientific, quality control, quality assurance, and manufacturing personnel, which may be difficult given the intense competition for qualified personnel in our industry as described elsewhere in this Risk Factors section. Even if we have sufficient capital to complete the build-out and staffing of the Carlsbad facility, we will need to conduct significant development work to transfer our manufacturing processes to enable manufacturing of any product candidate in our Carlsbad facility. Transferring manufacturing testing and processes and know-how is complex and involves review and incorporation of both documented and undocumented processes that may have evolved over time. If, in the future we were to engage a third-party manufacturer to conduct any of the cGMP manufacturing for our product candidates, or any product, we would face similar and significant challenges in transferring manufacturing processes and know-how, which may delay the manufacture of clinical trial or commercial supplies and disrupt or delay clinical development of our product candidates. In addition, transferring production to different facilities may require utilization of new or different processes to meet the specific requirements of a given facility. We may be required to demonstrate the comparability of clinical material generated at any new facility with material previously produced and used in clinical testing. Any inability to manufacture comparable material by us or any third-party manufacturer we may engage could delay the development and commercialization of our product candidates and may increase our development costs substantially.

Our product candidates are susceptible to product loss or reduced manufacturing success rates at various points during the manufacturing process, including quality issues due to contamination, equipment damage or failure, including during shipment or storage, failure of equipment to operate as expected, improper installation or operation of equipment, operator error, damage to, variability of, or improper use of raw materials or consumables necessary for the manufacturing process, inconsistency in yields, variability in product characteristics, and difficulties in scaling the production process. Any of these issues, and even minor deviations from normal manufacturing processes, could result in reduced production yields, product defects, and other supply disruptions and delays. If any contaminants are discovered in our product candidates during its production or clinical testing this could lead to the withdrawal of our products from clinical trials. Moreover, if the FDA or comparable foreign regulatory authorities determine that we or any third-party manufacture on which we rely are not in compliance with applicable laws and regulations, including cGMPs and cGTPs, the FDA or comparable foreign regulatory authority may not approve a marketing application until the deficiencies are corrected or we replace the manufacturer in our application with a manufacturer that is in compliance, which we may not be able to do on a timely basis at a reasonable cost, or at all. If we or any third-party manufacturer on which we rely fail to comply with applicable regulatory requirements, we may ultimately be unable to manufacture our product candidates. Any such failure could be the basis for the FDA to issue a warning letter, withdraw approvals for product candidates previously granted to us, or take other regulatory or legal action, including recall or seizure of supplies of the product candidate, total or partial suspension of production, suspension of then-ongoing clinical trials, refusal to approve then-pending applications or supplemental applications, detention of product, refusal to permit the import or export of products, injunction or imposing civil and criminal penalties. The occurrence of any of these issues could result in product liability claims, delay or failure to commence or complete clinical development, obtain regulatory approval of or commercialize our product candidates.

Our manufacturing operations, and those of any third-party manufacturer on which we may rely, are also susceptible to disruption due to resource constraints, labor shortages, supply chain failures, public health emergencies such as the COVID-19 pandemic, geopolitical conflict, acts of terrorism, political or economic instability or crises, natural disasters, and other reasons. Any adverse developments affecting manufacturing operations for any of our product candidates may result in shipment delays, inventory shortages, lot failures, product withdrawals or recalls, or other supply interruptions that could negatively impact the conduct of our clinical trials or our ability to successfully commercialize any product candidates for which we may obtain regulatory approval. We may also have to take inventory write-offs and incur other charges and expenses for products that fail to meet specifications as a result of defects or storage over an extended period of time, undertake costly remediation efforts, or seek more costly manufacturing alternatives, which may not be available on a timely basis, or at all.

Regenerative Medicine Advanced Therapy (“RMAT”) designation may not lead to a faster development or regulatory review or approval process and it does not increase the likelihood that a product candidate will receive marketing approval.

We have received RMAT designation from the FDA for OPC1 for the treatment of subacute spinal cord injuries. There is no assurance that we will be able to obtain RMAT designation for any other current or future product candidates. RMAT designation does not change the FDA’s standards for product approval, and there is no assurance that such designation will result in expedited review or approval or that the approved indication will not be narrower than the indication covered by the RMAT designation. Additionally, RMAT designation can be revoked if the criteria for eligibility cease to be met as clinical data emerges.

The commercial success of any of our current or future product candidates will depend upon the degree of market acceptance by physicians, patients, third-party payors, other healthcare providers and others in the medical community.

Even if a product candidate obtains regulatory approval, its commercial success will depend in part on physicians, patients, third-party payors, other healthcare providers and others in the medical community accepting our product candidates as medically useful, cost-effective, and safe. Any product we bring to the market may not gain market acceptance by such parties. The degree of market acceptance of any of our products will depend on several factors, including without limitation:

• the efficacy of the product as demonstrated in clinical trials and potential advantages over competing treatments;
• the prevalence and severity of any side effects;
• the clinical indications for which approval is granted, including any limitations or warnings contained in a product’s approved labeling;
• the convenience and ease of administration, including compared to alternative treatments;
• the cost of treatment, including in relation to alternative treatments;
• the willingness of the patients and physicians to accept and use these therapies;
• the marketing, sales and distribution support for the products;
• the publicity concerning our products or competing products and treatments; and
• the pricing and availability of coverage and adequate reimbursement by third-party payors and government agencies

Even if a product displays a favorable efficacy and safety profile upon approval, market acceptance of the product will be uncertain. Efforts to educate the medical community and third-party payors on the benefits of the products may require significant investment and resources and may never succeed. If our products fail to achieve an adequate level of acceptance by physicians, patients, third-party payors, other healthcare providers and others in the medical community, we will not be able to generate sufficient revenue to become or remain profitable.

If the market opportunities for our product candidates prove to be significantly smaller than we estimate, our business prospects may suffer.

Our projections of addressable patient populations within any particular disease state or condition that may benefit from treatment with our product candidates are based on our beliefs and estimates. Market opportunity estimates and growth forecasts are subject to significant uncertainty and are based on assumptions and estimates. Our estimates have been derived from a variety of sources, including market research and publications and scientific literature estimating the total number of potential patients and currently approved or used therapies. Our estimates are also based on assumptions regarding the potential size of the market assuming broad regulatory approval or potential usage by physicians beyond the approved label. Any of our estimates may prove to be incorrect. The scope of approval and potential use of any product candidate may be significantly narrower, and the number of patients may turn out to be lower than expected. Competitive products or approaches may be approved or come into use and the potentially addressable patient population for each of our product candidates may be limited or may not be amenable to treatment with our product candidates, and new patients may become increasingly difficult to identify or gain access to. If any of our estimates proves to be inaccurate, the market opportunity for any of our product candidates could be significantly diminished, which would have an adverse material impact on our business.

We face significant competition, and if our competitors develop and market products that are more effective, safer, more convenient, or less expensive than our product candidates, our commercial opportunities will be negatively impacted.

The biotechnology and pharmaceutical industries, and particularly the still nascent area of cell therapies, is intensely competitive and characterized by rapid and significant innovation. Any of our product candidates that obtains regulatory approval will face substantial competition based on many different factors, including the relative safety and efficacy of our product, the relative ease of administration of our product for healthcare providers, the convenience of our product for patients, the timing and scope of regulatory approvals for our product, the cost of manufacturing our product and whether sufficient quantities can be produced to meet demand, our marketing and sales capabilities or those of our collaborators, pricing, reimbursement coverage levels, and patent positions. Competing products could present superior treatment alternatives, including by being more effective, safer or easier or more convenient to administer, or may be less expensive for third-party payors or patients or marketed and sold more effectively than any products we may develop.

Our competitors include a variety of major pharmaceutical and biopharmaceutical companies and specialty pharmaceutical and biotechnology companies, as well as technology and therapeutics being developed at academic institutions and other public and private research institutions. Many of our competitors have greater financial and other resources, such as larger research and development staff, more experienced manufacturing organizations and facilities, and established sales and marketing organizations. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources, including intellectual property that may be necessary or useful for the development and commercialization of our product candidates, being concentrated in our competitors and becoming unavailable to us on reasonable commercial terms or at all. Third parties are commercializing, have developed, are developing or may develop product candidates, platform technologies and processes that will compete with ours. Competitive therapeutic treatments include those that have already been approved and accepted by the medical community and considered standard-of-care treatments, as well as novel treatments that are currently in preclinical or clinical development or may otherwise enter the market. For example, in February 2023, the FDA approved Apellis Pharmaceuticals, Inc.’s SYFOVRE® (pegcetacoplan injection) for the treatment of GA, and in February 2023, Iveric Bio, Inc.’s new drug application for Zimura® (avacincaptad pegol) for the treatment of GA secondary to AMD was accepted by the FDA. In addition to the foregoing, we believe that a significant number of product candidates are currently under development, which may become commercially available in the future for the treatment of indications for which we are developing, or may try to develop, our product candidates. For additional information regarding our competition, see “Item 1. Business—Competition,” above. I Regulatory approval and/or the achievement of clinical or commercial success of one or more competing products or product candidates may reduce or eliminate the market for our product candidates.. In addition, if one or more competing products fail to obtain regulatory approval or achieve clinical or commercial success and are perceived by regulators, healthcare providers, third-party payors or potential patients as comparable to our product candidates, our regulatory strategy could be impaired, our ability to obtain regulatory approval for our product candidates could be delayed or prevented, or the market for our product candidates may be reduced or eliminated.

Competitive products may make any product we develop obsolete or noncompetitive before we recover the expense of developing and commercializing the product. If we or our collaborators are unable to compete effectively, our opportunity to generate revenue from the sale of our products we may develop, if approved, would be adversely affected.

We face potential product liability, and, if successful claims are brought against us, we may incur substantial liability and costs. If the use or misuse of our products or product candidates harm patients or is perceived to harm patients even when such harm is unrelated to our products or product candidates, our regulatory approvals could be revoked, suspended or otherwise negatively affected, our reputation could suffer, and we could be subject to costly and damaging product liability claims.

We face the risk of incurring liabilities to clinical trial patients if they are injured as a result of their participation in clinical trials of our product candidates or products. We also face potential product liability for use or misuse of our products that obtain regulatory approval and are commercialized. We recently settled a product liability lawsuit, which we determined was not material, relating to the use in a clinical trial of a product candidate that we are no longer developing and have no plans to pursue, and that is not related to the cell therapy candidates we currently are developing. See Note 14 (Commitments and Contingencies) and Note 19 (Subsequent Events) to our consolidated financial statements included this report and “Item 3. Legal Proceedings” in Part I of this report for additional information. We may not successfully defend any product liability claims made against us in the future. Product liability claims could delay or prevent completion of our clinical development programs. Such claims could result in FDA or other regulatory authority investigations of the safety of our product candidates or products, our manufacturing processes and facilities or our marketing programs. If any claims are made and if liability can be established, the amount of any liability we or our affiliates may incur, could exceed any insurance coverage in effect, and the amount of the liability could be material to our financial condition and operating results. In addition, even if we successfully defend against product liability claims, we could incur substantial costs in defending against claims and suffer significant reputational harm that negatively impacts our business.

The use or misuse of our product candidates in clinical trials and the sale of any products for which we obtain marketing approval exposes us to the risk of product liability claims. Product liability claims might be brought against us by those who use our product candidates in clinical trials, consumers, healthcare providers, pharmaceutical companies or others selling or otherwise coming into contact with our products. There is a risk that our product candidates or future products may induce adverse events. If we cannot successfully defend against product liability claims, we could incur substantial liability and costs. Legal proceedings are inherently uncertain and unpredictable and proceedings believed to be immaterial could prove to have a material adverse effect on our business, operating results and financial condition. Regardless of merit or eventual outcome, product liability claims may result in:

• reputational harm;
• initiation of investigations by regulators;
• withdrawal of clinical trial participants;
• substantial costs due to related litigation;
• distraction of management’s attention from our primary business;
• substantial monetary awards to patients or other claimants;
• the inability to complete development of or commercialize our product candidates;
• product recalls, withdrawals or labeling, marketing or promotional restrictions; and
• decreased demand for any marketed products.

We may not be able to maintain appropriate product liability insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to product liability claims. If and when we obtain marketing approval for a product candidate and prior to commercial launch, we intend to expand our insurance coverage to include the sale of commercial products; however, we may be unable to obtain appropriate product liability insurance on commercially reasonable terms or in adequate amounts. Significant damages have been awarded in class action lawsuits based on drugs or medical treatments that had unanticipated adverse effects. A successful product liability claim or series of claims brought against us could cause the price of our common shares to decline and, if the amount of damages exceeds our insurance coverage, could adversely affect our results of operations and business.

We currently have no marketing and sales force or distribution capabilities. If we are unable to establish effective internal capabilities or effectively collaborate with third parties to market and sell our product candidates, if approved, our ability to generate product revenue will suffer.

We currently have no marketing, sales, or distribution capabilities because all of our cell therapy product candidates are in preclinical or early clinical development, or in OpRegen’s case, we have entered into an agreement whereby Roche has commercialization responsibility for the product, if approved. We will need to build on a territory-by-territory basis marketing, sales, distribution and supporting capabilities to commercialize any other product candidates that obtains regulatory approval, or selectively seek to enter into similar strategic collaborations or otherwise outsource these functions to one or more third parties such as contract sales organizations and distributors. There are significant risks involved if we decide to establish our own sales and marketing capabilities or enter into arrangements with third parties to perform these functions. To the extent that we enter into collaboration agreements with respect to marketing, sales, or distribution, our product revenue may be lower than if we directly marketed or sold any approved products. Such collaborative arrangements with partners may place the commercialization of our products outside of our control and would subject us to a number of risks, including that we may not be able to control the amount or timing of resources that a commercialization collaborator devotes to our products or that a collaborator’s willingness or ability to complete its obligations may be adversely affected by business combinations or significant changes in the collaborator’s business strategy. If we are unable to enter into these arrangements when needed on acceptable terms, or at all, we may not be able to successfully commercialize any of our product candidates that receive regulatory approval, or any such commercialization may experience delays or limitations. Building our own sales and marketing team with technical expertise and supporting distribution capabilities, would require a significant capital investment and require significant attention of our senior management team to manage, and any failure or delay in the development of those internal sales, marketing and distribution capabilities would adversely impact the commercialization of any of our product candidates that obtain approval. If we are unable to develop adequate marketing and sales capabilities on our own or effectively partner with third parties, our ability to generate product revenue will suffer and we may incur significant additional losses, which would have a material adverse effect on our business, financial condition, and results of operations.

Risks Related to our Intellectual Property

Our intellectual property may be insufficient to protect our products.

Our patents and patent applications are directed to compositions of matter, formulations, methods of use and/or methods of manufacturing, as appropriate. In addition to patenting our own technology and that of our subsidiaries, we have licensed patents and patent applications for certain stem cell technology, hEPC, and hES cell lines, hydrogel technology and other technology from other companies.

The patent positions of pharmaceutical and biotechnology companies, including ours, are generally uncertain and involve complex legal and factual questions. Our business could be negatively affected by any of the following:

• the claims of any patents that are issued may not provide meaningful protection, may not provide a basis for commercially viable products or may not provide us with any competitive advantages;
• our patents may be challenged by third parties;
• others may have patents of which we are not aware that relate to our technology or business that may prevent us from marketing our product candidates unless we are able to obtain a license to those patents;
• the pending patent applications to which we have rights may not result in issued patents;
• our patents may have claims that are inadequate to protect our competitive position on our products; and
• we may not be successful in developing additional proprietary technologies that are patentable.

In addition, others may independently develop similar or alternative technologies, duplicate any of our technologies and, if patents are licensed or issued to us, design around the patented technologies licensed to or developed by us. Moreover, we could incur substantial costs in litigation if we have to defend ourselves in patent lawsuits brought by third parties or if we initiate such lawsuits.

If we are unable to obtain and enforce patents and to protect our trade secrets, others could use our technology to compete with us, which could limit opportunities for us to generate revenues by licensing our technology and selling products.

Our success will depend in part on our ability to obtain and enforce patents and maintain trade secrets in the United States and in other countries. If we are unsuccessful at obtaining and enforcing patents, our competitors could use our technology and create products that compete with our products, without paying license fees or royalties to us. The preparation, filing, and prosecution of patent applications can be costly and time consuming. Our limited financial resources may not permit us to pursue patent protection of all of our technology and products in all key markets. Even if we are able to obtain issued patents covering our technology or products, we may have to incur substantial legal fees and other expenses to enforce our patent rights to protect our technology and products from infringing uses.

We also rely on trade secrets, including unpatented know-how, technology and other proprietary information, to establish and maintain a competitive position for our product candidates and any products. We seek to protect these trade secrets, in part, by entering into nondisclosure and confidentiality agreements with parties who have access to them, such as our employees, corporate collaborators, outside scientific collaborators, contract manufacturers, consultants, advisors and other third parties. We also enter into confidentiality and invention or patent assignment agreements with our employees and consultants. Despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts both within and outside the United States may be less willing or unwilling to protect trade secrets. Furthermore, if a competitor lawfully obtained or independently developed any of our trade secrets, we would have no right to prevent such competitor from using that technology or information to compete with us, which could harm our competitive position. Additionally, if the steps taken to maintain our trade secrets are deemed inadequate, we may have insufficient recourse against third parties for misappropriating the trade secrets.

We may not have the financial resources to finance the litigation required to preserve our patent and trade secret rights. Litigation, interferences, oppositions, inter partes reviews or other proceedings are, have been and may in the future be necessary in some instances to determine the validity and scope of certain of our proprietary rights, and in other instances to determine the validity, scope or non-infringement of certain patent rights claimed by third parties to be pertinent to the manufacture, use or sale of our products. This means that patents owned or licensed by us, or our trade secrets, may be lost if the outcome of a proceeding is unfavorable to us.

There is no certainty that our pending or future patent applications will result in the issuance of patents.

Our success depends in part on our ability to obtain and defend patent and other intellectual property rights that are important to the commercialization of our products and product candidates. The degree of patent protection that will be afforded to our products and processes in the U.S. and in other important markets remains uncertain and is dependent upon the scope of protection decided upon by the patent offices, courts, administrative bodies and lawmakers in these countries. We can provide no assurance that we will successfully obtain or preserve patent protection for the technologies incorporated into our products and processes, or that the protection obtained will be of sufficient breadth and degree to protect our commercial interests in all countries where we conduct business. If we cannot prevent others from exploiting our inventions, we will not derive the benefit from them that we currently expect. Furthermore, we can provide no assurance that our products will not infringe patents or other intellectual property rights held by third parties.

In Europe, there is uncertainty about the eligibility of hES cell subject matter for patent protection. The European Patent Convention prohibits the granting of European patents for inventions that concern “uses of human embryos for industrial or commercial purposes.” A recent decision at the Court of Justice of the European Union interpreted parthenogenetically produced hES cells as patentable subject matter. Consequently, the European Patent Office now recognizes that human pluripotent stem cells (including human ES cells) can be created without a destructive use of human embryos as of June 5, 2003, and patent applications relating to hES cell subject matter with a filing and priority date after this date are no longer automatically excluded from patentability under Article 53 (a) EPC and Rule 28(c) EPC.

A Patent Cooperation Treaty patent application related to OpRegen was filed on May 25, 2021, directed to the restoration of the anatomy or functionality of a retina with OpRegen. As with all patent applications, there is no certainty that this or any of our other pending or future patent applications will result in the issuance of patents.

Intellectual property we may develop using grants received from governmental entities are subject to rights maintained by those governments.

Research and development we perform that is funded by grants from governmental entities and any intellectual property that we create using those grants is subject to certain rights of the governmental entities to require that we license or grant rights to the intellectual property developed using that funding in certain circumstances.

We may become subject to claims for remuneration or royalties for assigned service invention rights by our employees, which could result in litigation and adversely affect our business.

We enter into agreements with our employees pursuant to which they agree that any inventions created in the scope of their employment are assigned to us or owned exclusively by us, without the employee retaining any rights. A significant portion of our intellectual property has been developed by our employees in the course of their employment for us. Under the Israeli Patent Law, 5727-1967 (the “Patent Law”), inventions conceived by an employee during the scope of his or her employment with a company are regarded as “service inventions,” which belong to the employer, absent a specific agreement between the employee and employer giving the employee service invention rights. The Patent Law also provides that if there is no such agreement between an employer and an employee, the Israeli Compensation and Royalties Committee, a body constituted under the Patent Law, shall determine whether the employee is entitled to remuneration for his or her inventions. Previous decisions by the Israeli Compensation and Royalties Committee have created uncertainty in this area regarding whether the right to receive remuneration for service inventions can be voluntarily waived by an employee and whether such waiver is enforceable. In addition, the Committee determined that even if such right to receive compensation and royalties for service inventions may be waived, the waiver should be specific. Subsequent court cases have not provided significant clarity on these matters.

The Israeli Supreme Court noted (in an obiter dictum) in 2012, without making any decisive ruling, that an employee who contributes to an invention during his employment could be allowed to seek compensation for it from their employer, even if the employee’s contract of employment specifically states otherwise and the employee has transferred all intellectual property rights to the employer. The Israeli Supreme Court considered the possibility that a contract that revokes the employee’s right for royalties and compensation may not necessarily foreclose the right of the employee to claim a right for royalties. As a result, even if we believe that none of our employees has any rights in any of our intellectual property, or to receive royalties, it is unclear if, and to what extent, our employees may be able to claim compensation with respect to our future revenue. As a result, we may receive less revenue from future products if such claims are successful, or incur additional royalty expenses, which in turn could impact our future profitability.

There is no certainty that we will be able to obtain licenses to intellectual property rights owned by third parties.

There are no assurances that any of our intellectual property rights will guarantee protection or market exclusivity for our products and product candidates. In such cases, we may need to obtain enabling licenses from third parties to protect our products and product candidates, try to secure market exclusivity or avoid infringing on the intellectual property rights of third parties. If we are unable to fully protect our product candidates or achieve market exclusivity for our products and product candidates, our financial success will be dependent, in part, on our ability to protect and enforce our intellectual property rights, to operate without infringing upon the proprietary rights of others, or, when necessary, our ability to obtain enabling licenses.

As an example, Astellas’ patent portfolio with respect to the manufacture of its RPE products could adversely impact our rights to manufacture OpRegen. Moreover, we could incur substantial costs in litigation if we have to defend ourselves in patent lawsuits brought by third parties or if we initiate such lawsuits. We may also face competition from companies that have filed patent applications relating to the propagation and differentiation of stem cells. Those companies include Ocata, which in 2015 had certain U.S. patents issue with claims directed to methods of producing RPE cells and isolating and purifying such cells. We may be required to seek licenses from these competitors in order to commercialize certain products proposed by us, and such licenses may not be granted.

Our commercial success depends in part on our avoiding infringement of the patents and proprietary rights of third parties. We cannot be certain that our platform technologies, product candidates, and other proprietary technologies we may develop will not infringe existing or future patents owned by third parties. The legal and administrative landscape related to infringement of the patents and proprietary rights of third parties is fluid as there is a substantial amount of litigation involving patents and other intellectual property rights in the biotechnology and pharmaceutical industries, as well as administrative proceedings for challenging patents. These include interference, derivation, inter partes review, post-grant review, and reexamination proceedings before the USPTO or oppositions and other comparable proceedings in foreign jurisdictions. Litigation and other legal proceedings relating to intellectual property claims, with or without merit, are unpredictable and generally expensive and time-consuming and, even if resolved in our favor, are likely to divert significant resources from our core business and distract our technical and management personnel from their normal responsibilities. Such litigation or proceedings could substantially increase our operating losses and reduce the resources available for development activities or any future sales, marketing, or distribution activities. We may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources and more mature and developed intellectual property portfolios. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to enter into or compete in the marketplace.

Risks Related to our Dependence on Third Parties

We may become dependent on possible future collaborations to develop and commercialize many of our product candidates and to provide the regulatory compliance, sales, marketing and distribution capabilities required for the success of our business.

We may enter into various kinds of collaborative research and development and product marketing agreements to develop and commercialize our product candidates. The expected future milestone payments and cost reimbursements from collaboration agreements could provide an important source of financing for our research and development programs, thereby facilitating the application of our technology to the development and commercialization of our products, but there are risks associated with entering into collaboration arrangements.

As described elsewhere in this Risk Factors section, we are dependent on our collaboration with Roche to develop and commercialize OpRegen, and we could become dependent upon one or more possible future collaborative arrangements. A collaborative arrangement upon which we might depend might be terminated by our collaboration partner or a partner might determine not to actively pursue the development or commercialization of our products. Termination of a collaboration agreement by a collaboration partner could dissuade other organizations from collaborating with us and negatively impact our ability to enter into new collaborations or achieve favorable collaboration terms. A collaboration partner also may not be precluded from independently pursuing competing products and drug delivery approaches or technologies.

There is a risk that a collaboration partner might fail to perform its obligations under the collaborative arrangements or may be slow in performing its obligations, or that we have a dispute that harms our working relationship and requires significant resources to resolve, or that we are unable to resolve on our own, resulting in costly legal proceedings. In addition, a collaboration partner may experience financial difficulties at any time that could prevent it from having available funds to contribute to the collaboration. If a collaboration partner fails to conduct its product development, commercialization, regulatory compliance, sales and marketing or distribution activities successfully and in a timely manner, or if it terminates or materially modifies its agreements with us, the development and commercialization of one or more product candidates could be delayed, curtailed or terminated because we may not have sufficient financial resources or capabilities to continue such development and commercialization on our own.

We do not have the ability to independently conduct clinical trials required to obtain regulatory approvals for our product candidates.

We currently rely, and plan to continue to rely, on third parties such as CROs, data management companies, contract clinical research associates, medical institutions, clinical investigators and contract laboratories to assist with preclinical development and conduct clinical trials of our product candidates. Due to our reliance on these third parties, we may not directly control the timing, conduct and expense of our clinical trials. If the third parties we engage fail to perform their contractual duties or regulatory obligations or fail to meet expected deadlines, if they need to be replaced or if the quality or accuracy of the data they obtain is compromised due to failing to adhere to our clinical protocols or regulatory requirements or for other reasons, our preclinical development activities or clinical trials may be extended, delayed, suspended or terminated, and we may not obtain regulatory approval for or successfully commercialize our product candidates.

In addition, quarantines, shelter-in-place and similar government orders, or the perception that such orders, shutdowns or other restrictions on the conduct of business operations could occur, related to COVID-19 or other public health crises could result in staffing shortages at these third parties, which could disrupt our clinical studies, increase development timelines, and have a material adverse impact on our business, prospects, financial condition and results of operations.

We obtain reagents and specialized materials and equipment required for the manufacture of our cell therapy product candidates from third-party manufacturers and suppliers, which include, in some instances, sole source manufacturers and suppliers. The loss of these suppliers, or their failure to provide us with sufficient key materials or equipment on a timely basis at an acceptable cost, or at all, could materially and adversely affect our business.

The development and manufacture of our cell-based product candidates depends on the availability of reagents and specialized materials and equipment which are required to be acceptable to the FDA and applicable foreign regulatory authorities, and such reagents, materials, and equipment may not be available to us on acceptable terms or at all. We rely on third-party suppliers for key components required for the manufacture of our product candidates, including in some cases, sole source manufacturers and suppliers, and we currently do not have long-term commitments or supply agreements to obtain certain of these components.

We use reagents, in our manufacturing processes, some of which are manufactured or supplied by small companies with limited resources and experience with respect to supporting clinical or commercial biologics production. We currently depend on a limited number of vendors for certain materials and equipment used in the manufacture of our product candidates. Some of these suppliers may not have the capacity to support manufacturing of products under cGMP or may otherwise be ill-equipped to support our needs, particularly as we scale up our manufacturing processes. Reagents and other key materials from these suppliers may have inconsistent attributes and introduce variability into our manufactured process and possibly into product candidates, which may contribute to variable patient outcomes and possible adverse events. We do not have long-term commitments or supply agreements with many of these suppliers and may not be able to enter into supply contracts with them on acceptable terms or at all. Accordingly, we may experience delays in receiving key materials and equipment to support our clinical, and ultimately commercial, manufacturing operations.

For some of the reagents, materials, and equipment we require, we currently rely and may in the future rely on sole source suppliers or a limited number of suppliers. We may be unable to continue to source reagents, materials, or equipment from any of these suppliers for various reasons, including due to regulatory actions or requirements affecting a supplier, adverse financial or other strategic developments experienced by a supplier, labor disputes or shortages, unexpected demands from other customers and supply limitations, or quality issues. We cannot be sure that these suppliers will remain in business, or that they will not be purchased by one of our competitors or another company that is not interested in continuing to supply us with these materials in sufficient quantities, on acceptable terms, or at all. The lead time needed to establish a relationship with a new supplier who has access to the required raw materials can be lengthy. The time and effort to identify and qualify a new supplier could result in additional costs, diversion of resources, or reduced manufacturing yields, any of which may negatively impact our business. Additionally, due to global geopolitical, economic, and other factors beyond our control, there has been, and there may continue to be, a shortage of key materials and equipment that are necessary to manufacture our product candidates, including certain consumables such as bags, flasks, and pipette tips, which has affected and may continue to affect our ability to obtain the materials and equipment necessary to manufacture our product candidates and increased our research and development costs. Failures or difficulties faced at any level of our supply chain could delay or impede the development and commercialization of our product candidates and adversely affect our business, financial condition and results of operations. In light of the unpredictable nature of the current economic climate, including global rates of inflation, it may be increasingly difficult for us to predict and control our future expenses for the reagents, materials, and equipment we require to manufacture our product candidates. If any of the foregoing events were to occur, we may experience significant delays in manufacturing our product candidates, and in turn, in the commencement and completion of preclinical development and testing or clinical trials and potential regulatory approval of our product candidates, which could harm our business.

If we are required to change suppliers, or modify the components, equipment, materials or disposables used for the manufacture of our product candidates, we may be required to change our manufacturing operations or clinical trial protocols or to provide additional data to regulatory authorities in order to use any alternative components, equipment, materials or disposables, any of which could set back, delay, or increase the costs required to complete our clinical development and commercialization of our product candidates. Additionally, any such change or modification may adversely affect the safety, efficacy, stability, or potency of our product candidates, and could adversely affect our clinical development of our product candidates and harm our business.

In some cases, specialized delivery systems or devices may be used to administer our cell therapy product candidates, and we may rely on third parties to manufacture and supply those systems or devices and provide us with intellectual property rights to develop and commercialize them with our cell therapies, if approved. If we are not able to obtain those systems or devices in quantities needed in accordance with our quality standards and regulatory requirements and at acceptable costs, or at all, or those systems or devices fail to perform as expected, clinical development and possible regulatory approval of our product candidates may be significantly delayed and more expensive than anticipated and our business may suffer.

The administration of certain of our cell therapy product candidates requires invasive surgical procedures. We may seek to improve the accuracy or reduce the complexity, risk and variability of administering of our cells to the targeted site in the human body by integrating into the surgical procedures specialized delivery systems or devices developed, manufactured and supplied by third parties. For example, we believe a novel parenchymal spinal delivery (“PSD”) system developed by a third party could improve usability and precision in administering OPC1 to the injury site in the spinal cord, hence we entered into an exclusive option and license agreement with that third party to collaborate on the clinical testing of the PSD system for OPC1. To the extent we collaborate with third parties for specialized delivery systems or devices for administration of our product candidates, we may become dependent on those third parties and their contract manufacturers and suppliers not only for rights to use those systems or devices, but also for the manufacture and supply of those systems or devices in sufficient quantities and at acceptable quality levels and costs for our clinical trials, and ultimately to potentially market and sell them with our product candidates, if approved. Our dependence on such third parties is subject to a multitude of risks, including these risks:

• They or their third-party manufacturers might not manufacture in a timely manner the device systems or components in the quantity or quality required to meet our clinical trial needs and, if approved, commercial needs.
• They or their third-party manufacturers may not perform as agreed, may terminate their agreements, or may not remain in the contract manufacturing business for the time required to supply our clinical trials or to successfully produce, store and distribute on a commercial scale, if approved.
• They or their third-party manufacturers may not produce the systems or devices in accordance with applicable regulatory requirements, and their processes or facilities may fail inspection by the FDA or corresponding state or foreign regulatory agencies. We will not have control over their compliance with applicable laws and regulations.
• They or their third-party manufacturers may not obtain or maintain intellectual property rights necessary for the development, manufacture and, if approved, commercialization of the systems or devices.
• They or their third-party manufacturers may experience manufacturing difficulties as a result of resource constraints, labor shortages, supply chain failures, public health emergencies such as the COVID-19 pandemic, geopolitical conflict, acts of terrorism, political or economic instability or crises, natural disasters, or other events outside of their control or the control of their third-party manufacturers. This may result in business closures that adversely affect our ability to obtain clinical or commercial supplies as needed.
• We may be subject to product liability exposure arising out of use of the systems or devices to administer our product candidates in clinical trials or, if approved, for commercial use, and our insurance may not cover all potential claims.

If any such third-party collaborator or their contract manufacturers or suppliers were to encounter any of these difficulties, our ability to commence and conduct clinical trials of certain of our cell therapy product candidates on communicated timelines, or at all, could be jeopardized. These third-party collaborators and their contract manufacturers and suppliers would also be subject to many of the same risks we face in developing our own manufacturing capabilities, as described elsewhere in these Risk Factors. Any delay or interruption in the supply of clinical trial supplies could delay the completion of clinical trials, increase the costs associated with maintaining clinical trial programs and, depending upon the period of delay, could require us to either conduct additional clinical trials at additional expense or terminate clinical trials completely. Each risk could delay our clinical trials, any potential approval of our product candidates by the FDA, or the commercialization of our product candidates, and could result in higher costs or deprive us of potential product revenue.

Risks Pertaining to Our Common Shares

The market price of our common shares has been and may continue to be volatile, and you could lose all or part of your investment.

The trading price of our common shares has been and is likely to continue to be highly volatile. The stock market in general, and the market for biotechnology companies, as well as small cap and microcap companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of particular companies. Broad market and industry factors may negatively affect the market price of our common shares, regardless of our actual operating performance, financial condition or progress in development of our product candidates. The market price for our common stock may be influenced by a variety of factors, some of which are beyond our control, including:

• delays in progress or completion of clinical trials of our product candidates, or other changes in the development status of or anticipated development timeline for our product candidates;
• results of clinical and nonclinical studies of our product candidates;
• changes in laws or regulations applicable to our product candidates, including but not limited to clinical trial and manufacturing requirements for regulatory approvals;
• developments concerning the manufacture or supply of our product candidates;
• unanticipated serious safety concerns related to the use of our product candidates or third-party product candidates perceived to be similar;
• delays in our regulatory submissions and any adverse development or perceived adverse development with respect to the applicable regulatory authority’s review of such filings, including without limitation the FDA’s issuance of a “refusal to file” letter or a request for additional information;
• adverse regulatory decisions relating to our product candidates or third-party product candidates perceived to be similar or competitive to ours;
• our inability to establish or maintain important collaborations and license agreements, including any material disputes or amendments;
• announcements of strategic collaborations or significant licenses, acquisitions or dispositions, joint ventures or capital commitments by us or companies perceived to be comparable to us;
• additions or departures of key personnel;
• our cash position and the level of expenses related to development of our product candidates;
• announcements or expectations of additional financing efforts;
• sales of our common shares by us, our insiders or other shareholders;
• trading volume of our common shares;
• changes in the market valuation of companies perceived to be comparable to us;
• actual or anticipated variations in our operating results;

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• changes in accounting policies and practices or material weakness or ineffectiveness of our internal controls or disclosure controls;
• disagreements with our auditor or termination of an auditor engagement;
• disputes or other developments relating to proprietary rights, including patents and trade secrets, or other avenues of market exclusivity for our product candidates or products and product candidates perceived to be competitive to ours;
• changes in the structure of healthcare payment systems;
• significant lawsuits, including intellectual property, product liability or shareholder litigation;
• publication of research reports about us or our industry, or cell therapies in particular, or positive or negative recommendations or withdrawal of research coverage by securities analysts;
• actual or potential suspension of trading or delisting of our common shares by our Stocks Exchanges.
• inclusion in or exclusion from stock indices such as the Russell 3000® Index;
• significant business disruptions caused by natural or manmade disasters, such as the COVID-19 pandemic;
• market conditions in the biotechnology sector and general political and economic conditions; and
• other factors described in this Risk Factors section.

In the past, securities class action litigation has often been instituted against companies following periods of volatility in the market price of their shares. This type of litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources, which could materially and adversely affect our business and financial condition.

Because we do not intend to pay cash dividends, our common shares may not be a suitable investment for anyone who needs to earn dividend income.

We do not pay cash dividends on our common shares. For the foreseeable future, we anticipate that any earnings generated in our business will be used to finance the growth of our business and will not be paid out as dividends to holders of our common shares. This means that any return to our shareholders will be limited to the appreciation of their shares and, therefore, our common shares may not be a suitable investment for anyone who needs to earn dividend income from their investments.

Insiders continue to have substantial influence over our company, which could limit your ability to influence the outcome of key transactions, including a change of control.

Our directors, executive officers and their affiliates, in the aggregate, owned approximately 25.0% of our outstanding common shares as of December 31, 2022. As a result, these shareholders, if acting together, will be able to heavily influence or control matters requiring approval by our shareholders, including the election of directors and the approval of mergers, acquisitions or other extraordinary transactions. They may also have interests that differ from yours and may vote in a way with which you disagree, and which may be averse to your interests. This concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deter certain public investors from purchasing our common shares and might ultimately affect the market price of our common shares.

If we or our subsidiaries issue additional common shares or preferred shares, investors in our common shares may experience dilution of their ownership interests.

We and our subsidiaries may issue additional common shares or other securities convertible into or exercisable for common shares to raise additional capital or to hire or retain employees or consultants, or in connection with future acquisitions of companies or licenses to technology or rights, in settlement of lawsuits, or for other business purposes. The future issuance of additional securities may be dilutive to our shareholders and may create downward pressure on the trading price of our common shares.

Our articles of incorporation, as amended, authorize us to issue an aggregate of 252,000,000 shares of capital stock consisting of 250,000,000 common shares and 2,000,000 “blank check” preferred shares, which means we may issue, without shareholder approval, one or more series of preferred stock having such designation, powers, privileges, preferences, including preferences over our common shares respecting dividends and distributions, terms of redemption and relative participation, optional, or other rights, if any, of the shares of each such series of preferred stock and any qualifications, limitations or restrictions thereof, as our board of directors may determine. The terms of one or more series of preferred stock could dilute the voting power or reduce the value of our common shares. Any preferred shares may also be convertible into common shares on terms that would be dilutive to holders of common shares. Our subsidiaries may also issue their own preferred shares with a similar impact on our ownership of the subsidiaries.

As of December 31, 2022, we had 18,173,332 common shares reserved for issuance upon the exercise of outstanding options under our employee stock option plans, and 938,870 common shares reserved for issuance upon the vesting and settlement of restricted stock units under our equity incentive plan. The exercise of outstanding options and vesting and settlement of outstanding restricted stock units would be dilutive to our existing shareholders.

We have used “at the market” (“ATM”) offerings of our common shares under agreements with Cantor Fitzgerald & Co. acting as sales agent and “shelf” registration statements on Form S-3 to raise substantial capital. For information regarding such sales of our common shares see “At the Market (‘ATM’) Offering” in Note 11 (Shareholders’ Equity) to our consolidated financial statements included in this report. We may continue to use ATM offerings to fund our operations. As of December 31, 2022, $63.8 million remained available for sale under our ATM offering program. Additional sales of our common shares in our ATM offering may result in substantial dilution to our existing shareholders and such sales, or the anticipation of such sales, may cause the market price of our common shares to decline.

The operation of some of our subsidiaries has been financed in part through the sale of shares of capital stock and warrants to purchase securities of those subsidiaries to private investors. Future sales of such securities by our subsidiaries could reduce Lineage’s ownership interest in the applicable subsidiary, and correspondingly dilute our shareholders’ ownership interests in our consolidated enterprise. Certain of our subsidiaries also have their own stock option plans and the exercise of stock options or the sale of restricted stock under those plans would also reduce Lineage’s ownership interest in the applicable subsidiary, with a resulting dilutive effect on the ownership interest of our shareholders in our consolidated enterprise.

There is no assurance that we will be able to maintain compliance with the NYSE American’s continued listing standards, and failure to do so could result in the suspension of trading or delisting of our common shares, which could substantially impair our shareholders’ ability to sell their shares and our ability to raise additional capital.

Our common shares are listed on the NYSE American. To maintain our listing, we must satisfy several continued listing standards, including financial condition and/or operating results standards, market value and distribution standards, a low selling price standard, and corporate governance standards. For example, for as long as we have net losses for our five most recent fiscal years, the exchange may consider delisting our common shares if our shareholders’ equity is less than $6 million, and under the low selling price standard, if the exchange determines our common shares have been selling for a substantial period of time at a low price per share, which we believe would be an average of less than $0.20 over 30 days, and we fail to effect a reverse stock split within a reasonable time after being notified by the exchange, the exchange will consider de-listing our common shares. In addition, any developments which substantially reduce the size of our company, the nature and scope of our operations, the value or amount of our securities available for the market, or the number of shareholders, may occasion a review of continued listing by the exchange. If a security sells at a price below $0.06, the exchange may immediately suspend the security from further trading on the exchange. We cannot assure you that we will be able to continue to meet the NYSE American’s continued listing requirements.

The suspension or delisting of our common shares, or the commencement of delisting proceedings, for whatever reason could, among other things, substantially impair our ability to raise additional capital; result in the loss of interest from institutional investors, result in restrictions or prohibitions on brokers from trading in our common shares, result in the loss of confidence in our company by shareholders, collaborators and employees, and result in fewer financing, strategic and business development opportunities. The suspension or delisting of our common stock, or the commencement of delisting proceedings for whatever reason may materially impair our shareholders’ ability to buy and sell shares of our common stock and could have an adverse effect on the market price of, and the efficiency of the trading market for, our common shares. In addition, our common shares have been included in the Russell 3000® Index from time to time. In the short term, inclusion in the index may favorably impact the price, trading volume, and liquidity of our common shares, in part, because holders attempting to track the composition of that index may have been required to buy our common shares, which could cause a material increase in the price at which our common shares trades. If our common shares are removed from the index because they do not meet the criteria for continued inclusion, index funds, institutional investors, or other holders attempting to track the composition of that index may be required to sell our common shares, which would adversely impact the price and frequency at which it trades.

General Risk Factors

We are subject to stringent and changing obligations related to data privacy and security. Our actual or perceived failure to comply with such obligations could lead to regulatory investigations or actions; litigation; fines and penalties; disruptions of our business operations; reputational harm; loss of revenue or profits; and other adverse business consequences.

In the ordinary course of business, we collect, receive, store, process, generate, use, transfer, disclose, make accessible, protect, secure, dispose of, transmit, and share (collectively, processing) personal data and other sensitive information, including data we collect about trial participants in connection with clinical trials. As a result, we are, or may become, subject to numerous data privacy and security requirements related to data privacy, security, protection and transfer under federal, state, local, and foreign laws, regulations, guidance, and industry standards. See “Item 1. Business—Government Regulation—Privacy and Data Security Laws,” above. These requirements may be subject to differing applications and interpretations, which may be inconsistent or conflict among jurisdictions. Preparing for and complying with these requirements requires significant resources and may necessitate changes to our information technologies, systems, and practices and to those of any third parties that process personal data on our behalf.

If we, or our personnel or third parties upon whom rely, fail, or are perceived to have failed, to address or comply with applicable data privacy, security, protection and transfer requirements, we could face significant consequences. These consequences may include, but are not limited to, government enforcement actions (e.g., investigations, fines, penalties, audits, inspections, and similar); litigation (including class-related claims); additional reporting requirements and/or oversight; bans on processing personal data; and orders to destroy or not use personal data. Any of these events could have a material adverse effect on our reputation, business, or financial condition, including but not limited to: loss of customers; interruptions in our business operations (including, as relevant, clinical trials); inability to process personal data or to operate in certain jurisdictions; limited ability to develop or commercialize our products; expenditure of time and resources to defend any claim or inquiry; adverse publicity; or revision or restructuring of our operations. In the United States, privacy and security obligations are often enforced under deceptive and unfair trade practice laws, using theories that a company’s activities were either misleading or unfair.

If our information technology systems or data, or those of third parties upon which we rely, are or were compromised, we could experience adverse consequences resulting from such compromise, including but not limited to regulatory investigations or actions; litigation; fines and penalties; disruptions of our business operations; reputational harm; loss of revenue or profits; loss of customers or sales; and other adverse consequences.

We are dependent on information technology systems and infrastructure to operate our business. In the ordinary course of our business, we may process confidential, and sensitive, including personal data (such as health-related data), intellectual property, and proprietary business information (collectively, sensitive information). It is critical that we do so in a secure manner to maintain the confidentiality, integrity and availability of such information. We have also outsourced some of our operations (including parts of our information technology infrastructure) to a number of third-party service providers who may have, or could gain, access to sensitive information. In addition, many of those third parties, in turn, subcontract or outsource some of their responsibilities to third parties.

Cyberattacks, malicious internet-based activity, and online and offline fraud are increasing in frequency, persistence, sophistication and intensity. These threats come from a variety of sources, including traditional computer “hackers,” threat actors, personnel (such as through theft or misuse), sophisticated nation states, and nation-state-supported actors. Some actors now engage and are expected to continue to engage in cyberattacks, including, without limitation, nation-state actors for geopolitical reasons and in conjunction with military conflicts and defense activities. During times of war and other major conflicts, we and the third parties upon which we rely may be vulnerable to a heightened risk of these attacks, including cyberattacks that could materially disrupt our systems and operations, supply chain, and ability to produce, sell and distribute our products. We and the third parties upon which we rely may be subject to a variety of evolving threats, including, but not limited to, malware (including as a result of persistent threat intrusions), malicious code (such as viruses and worms), ransomware attacks, denial-of-service attacks (such as credential stuffing), social engineering attacks (including phishing attacks), personnel misconduct or error, supply-chain attacks, software bugs, server malfunctions, software or hardware failures, loss of data or other technology assets, adware, telecommunication failures, earthquakes, fires, floods, and other similar threats. Although the aggregate impact on our operations and financial condition has not been material to date, we have been the target of events of this nature and expect them to continue.

Ransomware attacks, including by organized criminal threat actors, nation-states, and nation-state-supported actors, are becoming increasingly prevalent and severe and can lead to significant interruptions in our operations, loss of data and income, reputational harm, and diversion of funds. Extortion payments may alleviate the negative impact of a ransomware attack, but we may be unwilling or unable to make such payments due to, for example, applicable laws or regulations prohibiting such payments. Similarly, supply-chain attacks have increased in frequency and severity, and we cannot guarantee that third parties and infrastructure in our supply chain or our third-party partners’ supply chains have not been compromised or that they do not contain exploitable defects or bugs that could result in a breach of or disruption to our information technology systems or the third-party information technology systems that support us and our services. Additionally, many of our employees who began working from home early in the COVID-19 pandemic continue to work remotely at least part of the time, utilizing network connections outside our premises, which may increase risks to our information technology systems and data. Moreover, the prevalent use of mobile devices by our employees and third-party service providers to access confidential information increases the risk to our information technology systems and data. Future or past business transactions (such as acquisitions or integrations) could also expose us to additional cybersecurity risks and vulnerabilities, as our systems could be negatively affected by vulnerabilities present in acquired or integrated entities’ systems and technologies.

Any of the previously identified or similar threats could cause a security incident or other interruption. A security incident or other interruption could result in unauthorized, unlawful, or accidental acquisition, modification, destruction, loss, alteration, encryption, disclosure of, or access to our proprietary or sensitive information. A security incident or other interruption could disrupt our ability (and that of third parties upon whom we rely) to conduct our business operations and divert significant resources. Though we have insurance that may cover some of the costs and fees resulting from a cyberattack, data security incident, or data breach, that insurance may not be sufficient to cover all of the costs, fees, losses, damages, fines, and penalties that may arising from a data security incident

We may expend significant resources or modify our business activities to try to protect against security incidents. Certain data privacy and security obligations may require us to implement and maintain specific security measures and tools, industry-standard or reasonable security measures to protect our information technology systems and proprietary and sensitive information.

While we have implemented security measures to protect our information technology systems and infrastructure, there can be no assurance that such measures will prevent cyberthreats, cyberattacks, security incidents, data breaches, malware, ransomware attacks and other disruptions that could adversely affect our business. We may be unable in the future to detect vulnerabilities in our information technology systems because such threats and techniques change frequently, are often sophisticated in nature, and may not be detected until after a security incident has occurred. Despite our efforts to identify and remediate vulnerabilities, if any, in our information technology systems, our efforts may not be successful. Further, we may experience delays in developing and deploying remedial measures designed to address any such identified vulnerabilities. In addition, failure to maintain effective internal accounting controls related to security incidents and cybersecurity in general could impact our ability to produce timely and accurate financial statements and subject us to regulatory scrutiny.

Applicable data privacy and security obligations, including data breach notification laws in the US and elsewhere, may require us to notify relevant stakeholders of security incidents. Such disclosures are costly, and the disclosures or the failure to comply with such requirements could lead to adverse consequences. If we (or a third party upon whom we rely) experience a security incident or are perceived to have experienced a security incident, we may experience adverse consequences. These consequences may include: government enforcement actions (for example, investigations, fines, penalties, audits, and inspections); additional reporting requirements and/or oversight; restrictions on processing sensitive information (including personal data); litigation (including class claims); financial obligations to third parties, indemnification obligations; negative publicity; reputational harm; monetary fund diversions; interruptions in our operations (including availability of data); financial loss; and other similar harms. Security incidents and attendant consequences may cause interruptions in our operations and could result in a material disruption of our programs. For example, the loss of clinical trial or nonclinical study data for our product candidates could result in delays in our regulatory approval efforts and significantly increase our costs due to additional time and resources necessary to recover and verify or potentially reproduce the data.

Our contracts may not contain limitations of liability, and even where they do, there can be no assurance that limitations of liability in our contracts are sufficient to protect us from liabilities, damages, or claims related to our data privacy and security obligations. We cannot be sure that our insurance coverage will be sufficient to protect us from or to mitigate liabilities arising out of our privacy and security practices, that such coverage will continue to be available on commercially reasonable terms or at all, or that such coverage will pay future claims.

Failure of our internal control over financial reporting could harm our business and financial results.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Our growth and entry into new products, technologies and markets will place significant additional pressure on our system of internal control over financial reporting. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud. Operating our business through subsidiaries, some of which are located in foreign countries, also adds to the complexity of our internal control over financial reporting and adds to the risk of a system failure, an undetected improper use or expenditure of funds or other resources by a subsidiary, or a failure to properly report a transaction or financial results of a subsidiary. We allocate certain expenses among Lineage itself and one or more of our subsidiaries, which creates a risk that the allocations we make may not accurately reflect the benefit of an expenditure or use of financial or other resources by Lineage as the parent company and the subsidiaries among which the allocations are made. An inaccurate allocation may impact our consolidated financial results, particularly in the case of subsidiaries that we do not wholly own since our financial statements include adjustments to reflect the minority ownership interests in our subsidiaries held by others.

If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner or assert that our internal control over financial reporting is effective, or, when required, if our independent registered public accounting firm is unable to express an opinion or expresses a qualified or adverse opinion about the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common shares could be negatively affected. In addition, we could become subject to investigations by the NYSE American, the SEC, and other regulatory authorities, which could require additional financial and management resources.

Geopolitical risks associated with the ongoing military conflict between Russia and Ukraine could have an adverse impact on our business, financial condition and results of operations, including our clinical trials.

Our results of operations are affected by economic conditions, including macroeconomic conditions and levels of business confidence. The war in Ukraine and the uncertain nature, magnitude, and duration of the conflict and the potential effect of sanctions and other measures being imposed in response thereto have contributed to increased levels of economic and political uncertainty, which could have an adverse impact on macroeconomic factors that affect the financial markets, the global economy and our business and operations. Additionally, the ongoing conflict in Ukraine may disrupt the ability of third parties on which we rely to perform in accordance with our expectations, including on commercial research organizations to conduct clinical trials. Moreover, enrollment and retention of clinical trial participants may be adversely affected. We cannot be certain what the overall impact of this conflict will be on our ability to conduct and complete our clinical trials on schedule. However, interruptions of our clinical trials could significantly delay our clinical development plans and potential authorization or approval of our product candidates, which could increase our costs and jeopardize our ability to successfully commercialize our product candidates.

We may be adversely affected by the effects of inflation and other macroeconomic factors.

Inflation has the potential to adversely affect our liquidity, business, financial condition and results of operations by increasing our overall cost structure. The existence of inflation in the economy has resulted in, and may continue to result in, higher interest rates and capital costs, supply shortages, increased costs of labor, components, manufacturing and shipping, as well as weakening exchange rates and other similar effects. As a result of inflation, we may experience cost increases. Changes in other economic conditions, including rising interest rates, ongoing pandemics, including the COVID-19 pandemic, lower consumer confidence, volatile equity capital markets and ongoing supply chain disruptions and the impacts of the war in Ukraine, may also affect our business. Although we may take measures to mitigate the effects of economic conditions, if these measures are not effective, our business, financial condition, results of operations and liquidity could be materially adversely affected. Even if such measures are effective, there could be a difference between the timing of when the benefits of such measures and the effects of such conditions impact our results of operations. Given these economic considerations, among other potential consequences, cost increases may outpace our expectations, causing us to use our cash and other liquid assets faster than forecasted. If this happens, we may need to raise additional capital to fund our operations sooner than expected, which may not be available in sufficient amounts or on reasonable terms, if at all. See also the discussion in this Risk Factors section under “We will need to obtain substantial additional funding to complete the development and seek regulatory approval of our product candidates and to commercialize products approved for marketing, if any. If we are unable to obtain adequate capital when needed, we may delay, reduce, limit the pace of, suspend or discontinue our product and technology development programs or other operations, which could significantly harm our business and prospects and cause the market price of our common shares to decline.” In addition, if the risks described in this paragraph materialize, the possibility of other risks described herein materializing and/or the impact of those risks may increase.

Adverse litigation judgments or settlements resulting from legal proceedings in which we may be involved could expose us to monetary damages or limit our ability to operate our business.

We recently settled a putative shareholder class action lawsuit, as well as a product liability lawsuit, and may in the future become involved in other class actions, derivative actions, private actions, collective actions, investigations, and various other legal proceedings by shareholders, collaborators, clinical trial participants, employees, suppliers and other vendors, service providers, competitors, government agencies, or others. The results of any such litigation, investigations, and other legal proceedings are inherently unpredictable and expensive. Although some of the costs and expenses of such claims may be covered by insurance, any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, damage our reputation, require significant amounts of management time, and divert significant resources. Additionally, a dramatic increase in the cost of directors’ and officers’ liability insurance may cause us to opt for lower overall policy limits or to forgo insurance that we may otherwise rely on to cover significant defense costs, settlements, and damages awarded to plaintiffs. If any of these legal proceedings were to be determined adversely to us, or we were to enter into a settlement arrangement, we could be exposed to monetary damages or limits on our ability to operate our business, which could have an adverse effect on our business, financial condition, results of operations and prospects. In addition, the uncertainty associated with material litigation could lead to increased volatility in our stock price.

Our business could be negatively impacted by environmental, social and corporate governance (“ESG”) matters or our reporting of such matters.

There is an increasing focus from certain investors, employees, collaborators, and other stakeholders concerning ESG matters. While we have internal efforts directed at ESG matters and preparations for any increased required future disclosures, we may be perceived to be not acting responsibly in connection with these matters, which could negatively impact us. Moreover, the SEC has recently proposed, and may continue to propose, certain mandated ESG reporting requirements, such as the SEC’s proposed rules designed to enhance and standardize climate-related disclosures, which, if adopted, would significantly increase our compliance and reporting costs and may also result in disclosures that certain investors or other stakeholders deem to negatively impact our reputation, which could adversely affect the price of our common shares. In addition, except as required by SEC and applicable stock exchange rules, we currently do not generally report on ESG matters, including our environmental emissions, and lack of reporting could result in certain institutional and other investors declining to invest in our common shares.

Our business could be negatively affected as a result of actions of activist shareholders, and such activism could affect the trading value of our securities.

Shareholders may, from time to time, engage in proxy solicitations or advance shareholder proposals, or otherwise attempt to effect changes and assert influence on our board of directors and management, and the SEC’s new “universal proxy” rules could significantly lower the cost and increase the ease and likelihood of shareholder activism. Activist campaigns that contest or conflict with our strategic direction or seek changes in the composition of our board of directors could have an adverse effect on our operating results and financial condition. A proxy contest would require us to incur significant legal and advisory fees, proxy solicitation expenses and administrative and associated costs and require significant time and attention by our board of directors and management, diverting their attention from the pursuit of our business strategy. Any perceived uncertainties as to our future direction and control, our ability to execute on our strategy, or changes to the composition of our board of directors or senior management team arising from a proxy contest could lead to the perception of a change in the direction of our business or instability which may result in the loss of potential business opportunities, make it more difficult to pursue our strategic initiatives, or limit our ability to attract and retain qualified personnel and collaboration partners, any of which could adversely affect our business and operating results. If individuals are ultimately elected to our board of directors with a specific agenda, it may adversely affect our ability to effectively implement our current business strategy. We may choose to initiate, or may become subject to, litigation as a result of a proxy contest or matters arising from a proxy contest, which would serve as a further distraction to our board of directors and management and would require us to incur significant additional costs. In addition, actions such as those described above could cause significant fluctuations in the price of our common shares based upon temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying fundamentals and prospects of our business. Furthermore, the trading value of and demand for our common shares could be adversely affected by allegations made or reports issued by short sellers, analysts, activists or others regarding our business, further influencing volatility in the market price of our common shares.

Securities analysts may not initiate coverage or continue to cover our common shares, and this may have a negative impact on the market price of our common shares.

The trading market for our common shares depends, in part, on the research and reports that securities analysts publish about our business and our common shares. We do not have any control over these analysts. There is no guarantee that securities analysts will cover our common shares. If securities analysts do not cover our common shares, the lack of research coverage may adversely affect the market price of those shares. If securities analysts do cover our common shares, they could issue reports or recommendations that are unfavorable to the price of our common shares, and they could downgrade a previously favorable report or recommendation, and in either case our share prices could decline as a result of the report. If one or more of these analysts does not initiate coverage, ceases to cover our common shares or fails to publish regular reports on our business, we could lose visibility in the financial markets, which could cause our share prices or trading volume to decline.

General

We lease all the properties from which we operate our business. In general, we believe that our properties are well-maintained, adequate and suitable for our current operations and for our operations in the foreseeable future. See Note 14 (Commitments and Contingencies) to our consolidated financial statements included in this report for additional information regarding the properties we lease.

Lineage Facilities

Our corporate headquarters are in an office park in Carlsbad, California. We also lease industrial space adjacent to our corporate headquarters. The lease for office space we previously leased in Alameda, California expired on January 31, 2023.

Cell Cure Facilities

Under various leases, Cell Cure leases office and laboratory space in the Bio Park on the campus of the Hadassah University Hospital in Jerusalem, Israel.

We are not currently a party to any material legal proceedings. From time-to-time we may be involved in a variety of claims or litigation proceedings. Such proceedings may initially be viewed as immaterial but could later prove to be material. Litigation proceedings are inherently unpredictable and excessive verdicts do occur. Given the inherent uncertainties in litigation, even when we can reasonably estimate the amount of possible loss or range of loss and reasonably estimable loss contingencies, the actual outcome may change in the future due to new developments or changes in approach. In addition, such claims or litigation proceedings could involve significant expense and diversion of management’s attention and resources from other matters.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide information necessary to understand our audited consolidated financial statements for the two-year period ended December 31, 2022, and highlight certain other information which, in the opinion of management, will enhance a reader’s understanding of our financial condition, changes in financial condition and results of operations. In particular, the discussion is intended to provide an analysis of significant trends and material changes in our financial position and the operating results of our business during the year ended December 31, 2022 as compared to the year ended December 31, 2021. This discussion should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report. These historical financial statements may not be indicative of our future performance. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risks described throughout this report, particularly in “Item 1A. Risk Factors.”

Company and Business Overview

We are a clinical-stage biotechnology company developing novel cell therapies to address unmet medical needs. Our programs are based on our proprietary cell-based technology platform and associated development and manufacturing capabilities. From this platform, we design, develop, manufacture, and test specialized human cells with anatomical and physiological functions similar to, or identical to, cells found naturally in the human body. Cells which we manufacture are created by specific developmental biological differentiation protocols that we apply to established, well-characterized, and self-renewing pluripotent cell lines. These cells are transplanted into patients and are designed to (a) replace or support cells that are absent or dysfunctional due to degenerative disease, aging, or traumatic injury, and (b) restore or augment functional activity in the affected person.

Our strategy is to efficiently leverage our technology platform and our development, formulation, delivery, and manufacturing capabilities to advance our programs internally, or in conjunction with strategic partners, to further enhance their value and probability of success. As one example, in December 2021 we entered into a Collaboration and License Agreement with F. Hoffmann-La Roche Ltd and Genentech, Inc., a member of the Roche Group, wherein we granted to Roche exclusive worldwide rights to develop and commercialize retinal pigment epithelium cell therapies, including our proprietary cell therapy program known as OpRegen®, for the treatment of ocular disorders, including geographic atrophy (GA) secondary to age-related macular degeneration (AMD). Under the terms of the Roche Agreement, Lineage received a $50.0 million upfront payment and is eligible to receive up to $620.0 million in certain developmental, regulatory, and commercialization milestone payments. Lineage also is eligible to receive tiered double-digit percentage royalties on net sales of OpRegen in the U.S. and other major markets. See Note 14 (Commitments and Contingencies) to our consolidated financial statements included elsewhere in this Report for discussion on the Roche Agreement.

As of December 31, 2022, we have five allogeneic, or “off-the-shelf,” cell therapy programs in development, of which three have reached clinical testing:

Product Candidates

• OpRegen®, an allogeneic retinal pigment epithelium cell replacement therapy currently in a Phase 2a multicenter clinical trial, being conducted by Genentech, for the treatment of geographic atrophy (GA) secondary to age-related macular degeneration (AMD), also known as atrophic or dry AMD. A previous Phase 1/2a trial conducted by Lineage enrolled twenty-four (24) individuals with dry AMD with GA. In December 2021, this program was partnered with Roche for further clinical development and commercialization.
• OPC1, an allogeneic oligodendrocyte progenitor cell therapy currently in long-term follow-up from a Phase 1/2a multicenter clinical trial for cervical spinal cord injuries. To date, five (5) patients with thoracic spinal cord injuries and twenty-five (25) patients with cervical spinal cord injuries have been enrolled in clinical trials of OPC1. The clinical development of OPC1 has been partially funded by $14.3 million received under a grant from the California Institute for Regenerative Medicine. Additional clinical trials are being planned.

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• VAC, an allogeneic cancer immunotherapy comprised of antigen-presenting dendritic cells. One of the VAC product candidates, VAC2, is currently in a Phase 1 clinical trial in non-small cell lung cancer. This clinical trial is being funded and conducted by Cancer Research UK, one of the world’s largest independent cancer research charities. An additional VAC-based product candidate is in preclinical development with our partner, Immunomic Therapeutics, Inc., for the treatment of glioblastoma multiforme.
• ANP1, an allogeneic auditory neuron progenitor cell transplant currently in preclinical development for the treatment of debilitating hearing loss.
• PNC1, an allogeneic photoreceptor cell transplant currently in preclinical development for the treatment of vision loss due to photoreceptor dysfunction or damage.

Other Programs

We have additional undisclosed product candidates being considered for development, which cover a range of therapeutic areas and unmet medical needs. Generally, these product candidates are based on the same platform technology and employ a similar guided cell differentiation and transplant approach as the product candidates detailed above, but in some cases may also include genetic modifications designed to enhance efficacy and/or safety profiles.

In addition to seeking to create value for shareholders by developing product candidates and advancing those candidates through clinical development, we also may seek to create value from our large patent estate and additional related technologies and capabilities, through partnering and/or strategic transactions.

Critical Accounting Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts in our consolidated financial statements and related notes. Our significant accounting policies are described in Note 2 (Significant Accounting Policies) to our consolidated financial statements included elsewhere in this report. We have identified below our critical accounting policies and estimates that we believe require the greatest amount of judgment. On an ongoing basis, we evaluate estimates which are subject to significant judgment, including those related to going concern assessment of our consolidated financial statements, useful lives associated with long-lived assets, including evaluation of asset impairment, allowances for uncollectible accounts and financing receivables, valuing shares owned in nonconsolidated companies using the equity method of accounting, loss contingencies, deferred income taxes and tax reserves, including valuation allowances related to deferred income taxes, and assumptions used to value stock-based awards, debt or other equity instruments. Actual results could differ materially from those estimates. On an ongoing basis, we evaluate our estimates compared to historical experience and trends which form the basis for making judgments about the carrying value of assets and liabilities. To the extent that there are material differences between our estimates and our actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.

We believe the assumptions and estimates associated with the following have the greatest potential impact on our consolidated financial statements.

Going concern assessment – In accordance with Accounting Standards Update 2014-15, Presentation of Financial Statements – Going Concern, we assess going concern uncertainty in our consolidated financial statements to determine if we have sufficient cash and cash equivalents on hand and working capital to operate for a period of at least one year from the date our consolidated financial statements are issued or are available to be issued, which is referred to as the “look-forward period” as defined by ASU No. 2014-15. As part of this assessment, based on conditions that are known and reasonably knowable to us, we will consider various scenarios, forecasts, projections, and estimates, and we will make certain key assumptions, including the timing and nature of projected cash expenditures or programs, and our ability to delay or curtail those expenditures or programs, if necessary, among other factors. Based on this assessment, as necessary or applicable, we make certain assumptions concerning our ability to curtail or delay research and development programs and expenditures to the extent we deem probable those implementations can be achieved and we have the proper authority to execute them within the look-forward period in accordance with ASU 2014-15.

Revenue recognition - Lineage recognizes revenue in accordance with Financial Accounting Standards Board (“FASB”) ASU 2014-09*, Revenues from Contracts with Customers (Topic 606)*, and in a manner that depicts the transfer of control of a product or a service to a customer and reflects the amount of the consideration it is entitled to receive in exchange for such product or service. In doing so, Lineage follows a five-step approach: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations; and (v) recognize revenue when (or as) the customer obtains control of the product or service. Lineage considers the terms of a contract and all relevant facts and circumstances when applying the revenue recognition standard. Lineage applies the revenue recognition standard, including the use of any practical expedients, consistently to contracts with similar characteristics and in similar circumstances. As part of the accounting treatment for these contracts, we must develop estimates and assumptions that require judgement to determine the underlying stand-alone selling price for each performance obligation which determines how the transaction price is allocated among the performance obligations.

Collaborative agreements - We review collaborative agreements to determine if the accounting treatment falls under Accounting Standards Codification, Topic 606*, Revenue from Contracts with Customers (“*ASC 606”), or Accounting Standards Codification *Topic 808, Collaborative Arrangements (“*ASC 808”). While these agreements may be within the scope of ASC 808, we may analogize to ASC 606 for some aspects of the agreements.

The terms of our collaborative agreements typically include one or more of the following: (i) upfront fees; (ii) milestone payments related to achievement of development or commercial goals; (iii) royalties on net sales of licensed products; and (iv) reimbursement of cost-sharing of R&D expenses. Each of these payments eventually result in collaboration revenues. When a portion of non-refundable upfront fees or other payments received are allocated to continuing performance obligations under the terms of a collaborative arrangement, they are recorded as deferred revenue and recognized as collaboration revenue when (or as) the underlying performance obligation is satisfied.

To identify the performance obligations within the collaboration agreements, we first identify all the promises in the contract (i.e., explicit and implicit), which may include a customer option to acquire additional goods or services for free or at a discount. We exclude any immaterial promises from the assessment of identifying performance obligations. When an option is identified as providing a customer with a material right, the option is identified as a performance obligation. A portion of the transaction price is then allocated to the option and recognized when (or as) the future goods or services related to the option are provided or when the option expires.

As part of the accounting treatment for these agreements, we must develop estimates and assumptions that require judgement to determine the underlying stand-alone selling price for each performance obligation which determines how the transaction price is allocated among the performance obligations. The following items are estimated in the calculation of the stand-alone selling price: forecasted revenues and development costs, development timelines, discount rates and probabilities of technical and regulatory success. We evaluate each performance obligation to determine if they can be satisfied at a point in time or over time, and we measure the services delivered to our collaboration partners each reporting period, which is based on the progress of the related program. If necessary, we adjust the measure of performance and related revenue recognition. Any such adjustments are recorded on a cumulative catch-up basis which would affect revenue and net income (loss) in the period of adjustment. In addition, variable consideration (e.g., milestone payments) must be evaluated to determine if it is constrained and, therefore, excluded from the transaction price.

Upfront fees - If a license to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize collaboration revenues from the transaction price allocated to the license when the license is transferred to the licensee, and the licensee is able to use and benefit from the license. When the license is determined to be non-distinct, we utilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time, and, if over time, the appropriate method of measuring progress for purposes of recognizing collaboration revenue from the allocated transaction price. For example, when we receive upfront fees for the performance of research and development services, or when research and development services are not considered to be distinct from a license, we recognize collaboration revenue for those units of account over time using a measure of progress. We evaluate the measure of progress at each reporting period and, if necessary, adjust the measure of performance and related revenue as a change in estimate.

Milestone payments - At the inception of each collaboration agreement that includes milestone payments (variable consideration), we evaluate whether the milestones are considered probable of being reached and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our or the collaboration partner’s control, such as non-operational developmental and regulatory approvals, are generally not considered probable of being achieved until those approvals are received. At the end of each reporting period, we re-evaluate the probability of achievement of milestones that are within our or the collaboration partner’s control, such as operational developmental milestones and any related constraint, and if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect collaboration revenues and net income (loss) in the period of adjustment. Revisions to our estimate of the transaction price may also result in negative collaboration revenues and net income (loss) in the period of adjustment.

Research and development – Research and development expenses consist of costs incurred for company-sponsored, collaborative and contracted research and development activities. These costs include direct and research-related overhead expenses including compensation and related benefits, stock-based compensation, consulting fees, research and laboratory fees, rent of research facilities, amortization of intangible assets, and license fees paid to third parties to acquire patents or licenses to use patents and other technology. Research and development costs which have an alternative future use will be capitalized as tangible assets, and costs with no future benefit or alternative use will be expensed as incurred. Research and development expenses incurred and reimbursed by grants from third parties approximate the grant income recognized in the consolidated statements of operations. Royalty expenses or sublicensing fees are recorded as research and development costs, unless these costs are associated with royalties from product sales, which we classify as cost of sales on our consolidated statements of operations. We estimate preclinical, clinical, and other research related expenses based on services performed, pursuant to arrangements with contract research organizations, that conduct studies and research on our behalf. We estimate these expenses based on regular reviews with internal management personnel and external service providers as to the progress or stage of completion of services and the contracted fees to be paid for such services. Based upon the combined inputs of internal and external resources, if the actual timing of the performance of services or the level of effort varies from the original estimates, we will adjust the accrual accordingly.

Stock-based compensation – We follow accounting standards governing share-based payments, which require the measurement and recognition of compensation expense for all share-based compensation awards made to directors and employees, including employee stock options, based on estimated fair values. We utilize the Black-Scholes option pricing model. Our determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, expected stock price volatility over the term of the awards, and the expected term of options granted, which is derived using the simplified method, which is an average of the contractual term of the option and its vesting period, as we do not have sufficient historical exercise data. The risk-free rate is based on the U.S. Treasury yield in effect at the time of grant for U.S. Treasury notes with maturities similar to the expected term of the awards. Forfeitures are accounted for as they occur.

For restricted stock unit awards (“RSUs”) subject to service and/or performance vesting conditions, the grant-date fair value is established based on the closing price of Lineage’s common shares on such date. Stock-based compensation expense for RSUs subject to only service conditions is recognized on a straight-line basis over the service period. Stock-based compensation expense for RSUs with both service and performance conditions is recognized on a graded basis only if it is probable that the performance condition will be achieved. Lineage accounts for forfeitures of RSUs as they occur in determining stock-based compensation expense. For RSUs subject to a market condition, the grant-date fair value is estimated using a Monte Carlo valuation model. The model is based on random projections of stock price paths and must be repeated numerous times to achieve a probabilistic assessment. Lineage recognizes stock-based compensation expense for RSUs subject to market-based vesting conditions regardless of whether it becomes probable that the vesting conditions will be achieved, and stock-based compensation expense for such RSUs is not reversed if vesting does not actually occur.

Although the fair value of employee stock options is determined in accordance with FASB guidance, changes in the assumptions can materially affect the estimated value and therefore the amount of compensation expense recognized in the consolidated financial statements. In management’s opinion, the existing valuation models may not provide an accurate measure of the fair value of employee stock options because the option-pricing model value may not be indicative of the fair value that would be established in a willing buyer/willing seller market transaction.

Results of Operations

Comparison of Years Ended December 31, 2022 and 2021

Revenues

The following table shows our revenues for the years ended December 31, 2022 and 2021 (amounts in thousands except percentages).

Total revenues for the year ended December 31, 2022 were $14.7 million compared to $4.3 million for the year ended December 31, 2021. The $10.4 million increase was primarily due to a $12.2 million increase in collaboration revenues related to the current year recognition of the $50.0 million upfront payment under the Roche Agreement, which was included in deferred revenues at December 31, 2021 (see Note 3 (Revenue) to our consolidated financial statements included in this report for additional information), offset by a $1.4 million decrease in royalties which were significantly higher in the prior year resulting from the recording of royalty revenues of approximately $1.8 million from a certain customer during the prior year based on the customers updated communication to us regarding royalties due, and a $0.4 million decrease in grant revenues due to less grant-related activities during the year. Grant revenues are generated primarily by our subsidiary Cell Cure from the IIA for the development of OpRegen and our bio retina program. The decrease in our grant revenues for the year ended December 31, 2022 as compared to the year ended December 31, 2021, were primarily due to less grant-related activities.

Operating Expenses

Our operating expenses consist of research and development expenses and general and administrative expenses.

Research and development expenses. These expenses consist of costs incurred for company-sponsored, collaborative and contracted research and development activities. These costs include direct and research-related overhead expenses including compensation and related benefits, stock-based compensation, consulting fees, research and laboratory fees, rent of research facilities, amortization of intangible assets, and license fees paid to third parties to acquire patents or licenses to use patents and other technology. Research and development expenses that have an alternative future use will be capitalized as tangible assets, and costs with no future benefit or alternative use will be expensed as incurred. Research and development expenses incurred and reimbursed by grants from third parties approximate the grant income recognized in our consolidated statements of operations. Royalties and sublicensing fees are recorded as research and development expenses, unless they are associated with royalties from product sales, which we classify as cost of sales in our consolidated statements of operations.

General and administrative expenses. These expenses include employee and director compensation and related benefits, including stock-based compensation, for executive and corporate personnel, professional and consulting fees, and allocated overhead such as facilities rent and equipment rent and maintenance, insurance costs allocated to general and administrative expenses, costs of patent applications, prosecution and maintenance, stock exchange-related costs, depreciation expense, marketing costs, legal and accounting costs, and other miscellaneous.

The following table shows our operating expenses for the years ended December 31, 2022 and 2021 (amounts in thousands, except percentages).

Research and development expenses. The $19.9 million year-over-year decrease in research and development expense is primarily the result of $21.0 million of royalty and redemption fee expense recorded in 2021 for payments owed to Hadasit and the IIA pursuant to financial obligations to each of them in connection with the $50.0 million upfront payment we received from Roche in January 2022 under the Roche Agreement and for which there was no similar expense in 2022 (see Note 14 (Commitments and Contingencies) to our consolidated financial statements included in this report).

General and administrative expenses. The $4.3 million year-over-year increase in general and administrative expenses was primarily attributable to (i) a $2.1 million increase in legal and litigation expense, (ii) a $1.3 million increase in employee salaries and benefits, (iii) a $0.9 million increase in stock-based compensation related expenses (see Note 12 (Stock Based-Awards) to our consolidated financial statements included in this report for additional information), (iv) a $0.4 million increase for audit and tax services, (v) a $0.2 million increase in insurance costs, (vi) a $0.2 million increase in consulting expenses, (vii) a $0.1 million increase in recruiting and hiring fees, (viii) a $0.1 million increase in travel expenses, (ix) a $0.6 million decrease in patent related costs and (x) a $0.5 million decrease in investor relations expenses.

The following table shows the amount of our total research and development expenses allocated to our primary research and development projects for the periods presented (amounts in thousands, except percentages).

Research and development expenses. For the year ended December 31, 2022, the $19.9 million decrease in total research and development expenses is mainly attributable to: (i) a $20.5 million net decrease in expenses related to our OpRegen program, attributable to last year’s payment of $21.0 million for royalty and redemption fee expenses paid to Hadasit and the IIA, respectively; (ii) a $1.1 million net decrease in expenses related to our OPC1 program, primarily related to a decrease in manufacturing activities for the program; (iii) a $0.4 million increase in expense related to our VAC program, primarily related to manufacturing improvement activities; (iv) a $0.7 million increase in expenses related to our ANP1 program, primarily related to manufacturing activities for our allogeneic auditory neuron cell transplant program; and (v) a $0.5 million increase in expenses related to our PNC1 program, primarily related to research and development activities for our allogeneic photoreceptor cell transplant program.

Other Income and Expenses, Net

The following table shows the amount of other income (expenses), net, during the year ended December 31, 2022 and 2021 (in thousands):

Marketable debt securities. During the third quarter of 2022, we began to invest our excess cash in short-term U.S. Treasury securities resulting in an increase in interest income. See Note 4 (Marketable Debt Securities) to our consolidated financial statements included in this report for additional information regarding our marketable debt securities.

Marketable equity securities. We expect our total other income (expenses), net, to fluctuate each reporting period based on the changes in the market price of the common stock of OncoCyte Corporation (“OncoCyte”), which could impact our net income or loss reported in our consolidated statements of operations for a particular reporting period.

We also account for the shares we hold in Hadasit Bio-Holdings as marketable equity securities. These shares are carried at fair market value on our consolidated balance sheets. The accounting transactions for these shares were not material for either of the years ended December 31, 2022 and 2021.

See Note 5 (Marketable Equity Securities) to our consolidated financial statements included in this report for additional information regarding our marketable equity securities.

Gain on extinguishment of debt. For the year ended December 31, 2021, Lineage recognized a gain of $0.5 million on extinguishment of debt in connection with the forgiveness in full of the loan it obtained under the Paycheck Protection Program.

Other income and (expenses), net. Other expenses, net, for each of the years ended December 31, 2022 and 2021 consisted primarily of net foreign currency transaction gains and losses recognized by our subsidiaries Cell Cure and ES Cell International Pte. Ltd. Foreign currency transaction gains and losses for the periods presented are principally related to the remeasurement of the U.S. dollar denominated notes payable and notes receivable between Cell Cure and Lineage.

Income Taxes

Under ASC 740, Income Taxes, a valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. We established a full valuation allowance as of December 31, 2018 due to the uncertainty of realizing future tax benefits from the net operating loss carryforwards and other deferred tax assets, including foreign net operating losses generated by its subsidiaries.

For the year ended December 31, 2022, Lineage recorded a withholding tax for $0.5 million on interest expense deemed paid to Lineage from Cell Cure, related to the purchase of intellectual property pursuant to the US Israeli tax treaty. For the years ended December 31, 2022, and 2021, Lineage did not record a deferred tax benefit. See Note 13 (Income Taxes) for additional information.

Liquidity and Capital Resources

Sources of Liquidity

We have historically funded our operations primarily through proceeds from the sale of shares of our common stock, the sale of common stock of our former subsidiaries, research grants, revenues from collaborations, and royalties from product sales that are unrelated to our current cell therapy product candidates. During 2022, we funded our operations primarily through (a) the $50.0 million upfront payment received under the Roche Agreement, (b) $1.6 million of proceeds from the exercise of warrants and employee stock options, and (c) $1.3 million in royalties received. During 2022, we did not raise any proceeds from research grants, sales of our common stock or from sales of common stock of our former subsidiaries.

As of December 31, 2022, $63.8 million remained available for sale under our at the market offering program and we owned marketable equity securities with a fair value of $0.4 million based on the closing price of such securities on that date. See Note 5 (Marketable Equity Securities) and Note 11 (Shareholders’ Equity) to our consolidated financial statements included in this report for additional information regarding the marketable equity securities we own and our at the market offering program, respectively. We may sell shares of our common stock and the marketable securities we own for liquidity. However, when we can effect such sales and the amount of shares we can sell depends on a variety of factors to be determined by us from time to time, including, among others, market conditions, the trading price and volume of our common stock and of the marketable securities we own. The market value of our marketable equity securities may not represent the amount that could be realized in a sale of such securities due to various market factors, including prevailing market conditions and prices at the time of any sale and subsequent sales of securities by the entities. In addition, the value of our marketable equity securities may be significantly and adversely impacted by deteriorating global economic conditions and the recent disruptions to and volatility in the credit and financial markets in the United States and worldwide resulting from the ongoing pandemics, including the COVID-19 pandemic, geopolitical conflicts, rising inflation and interest rates, and other macroeconomic factors.

Cash Flows

Cash provided by (used in) operating activities

Net cash provided by operating activities was $1.1 million for the year ended December 31, 2022, which primarily reflects the net changes in assets and liabilities of $18.7 million, plus the $5.0 million in non-cash expenses for stock-based compensation and depreciation and amortization, less the loss from operations of $22.5 million. The change in assets and liabilities was impacted by the receipt of the $50.0 million upfront payment under the Roche Agreement, and subsequent related payments to the IIA and Hadasit (see Note 14 (Commitments and Contingencies) to the consolidated financial statements included in this report for further explanation), partially offset by the accrual of the litigation settlement also as described in Note 14 (Commitments and Contingencies). The unrealized loss on marketable equity securities and foreign currency remeasurement had no effect on the cash flows.

Net cash used in operating activities of $23.6 million for the year ended December 31, 2021 primarily reflects the loss from operations of $49.2 million adjusted for the changes in assets and liabilities of $21.1 million. These items were offset primarily by non-cash expenses of $3.5 million for stock-based compensation and $0.9 million of depreciation and amortization. The unrealized loss on marketable securities, and foreign currency remeasurement are non-cash items that had no effect on cash flows.

Cash provided by (used in) investing activities

Cash used in investing activities for the year ended December 31, 2022 was $46.2 million and consisted of $53.4 million related to the purchase of U.S. Treasury securities and $0.4 million for the purchase of equipment, offset with $7.7 million in U.S. Treasuries which matured during the year.

Cash provided by investing activities of $9.7 million for the year ended December 31, 2021 was associated primarily with receipts of $10.1 million from sales of a portion of our OncoCyte holdings, offset with the purchase of equipment for $0.4 million.

Cash provided by financing activities

Cash provided by financing activities for the year ended December 31, 2022 was $1.6 million and consisted of $1.0 million of proceeds from the exercise of warrants to purchase shares of Cell Cure and $0.6 million of proceeds from the exercise of employee stock options.

Cash provided by financing activities of $36.9 million for the year ended December 31, 2021 was associated primarily with proceeds net of financing costs of $29.8 million from the sale of common shares in at the market offerings under our Controlled Equity OfferingSM Sales Agreement with Cantor Fitzgerald & Co. and proceeds of $7.2 million from the exercise of employee stock options.

Financial Obligations

Our financial obligations primarily consist of obligations to our licensors under our in-license agreements, obligations related to grants received from government entities, including the IIA, obligations under vendor contracts to provide research services and other purchase commitments with suppliers.

The obligations under our in-license agreements require us to make future payments relating to sublicense fees, milestone fees, royalties and reimbursement of patent maintenance costs. Sublicense fees are payable to licensors when we sublicense underlying intellectual property to third parties and are based on a percentage of the license fees we receive from sublicensees. Milestone fees, including those related to the Roche Agreement, are due to licensors upon future achievement of certain commercial, development and regulatory milestones. Royalties, including those related to royalties we may receive under the Roche Agreement, are payable to licensors based on a percentage of net sales of licensed products. Reimbursement of patent maintenance costs are payable to licensors as reimbursement for the cost of maintaining license patents. Due to the contingent nature of these payments, the amounts may fluctuate significantly from period to period. As of December 31, 2022, we have not included any financial obligations under our in-license agreements in our consolidated balance sheet because the achievement and timing of the events that would require the payment of such financial obligations is not fixed and determinable.

As discussed in “Part I—Item 1. Business—Grants from Government Entities,” above, we have received grants under the Innovation Law and are required to pay royalties to the IIA from the revenues generated from the sale of product candidates and related services developed, in whole or in part pursuant to, or as a result of, a research and development program funded by the IIA. Under the Innovation Law, we are also required to pay redemption fees to the IIA. To date, through a series of separate grants beginning in 2007, Cell Cure has received a total of $15.4 million from the IIA to support the OpRegen program. We are obligated to pay approximately 24.3% of any future payments received under the Roche Agreement to the IIA, up to an aggregate cap on all payments to IIA, such cap growing over time via interest accrual until paid in full, which currently stands at approximately $91.2 million. Redemption fees due to the IIA under the Innovation Law are due upon receipt of any milestone and royalties received under the Roche Agreement. As of December 31, 2022, we have not included any future financial obligations due to the IIA under the Innovation Law in our consolidated balance sheet because the achievement and timing of the events that would require future payments to the IIA under the Innovation Law is not fixed and determinable. See Note 14 (Commitments and Contingencies) to our consolidated financial statements included in this report for additional information.

Under the terms of the leases for the facilities from which Cell Cure and Lineage operate, a total of $4.3 million of rent payments will become due, of which $1.1 million will become due in 2023.

In the normal course of business, we enter into services agreements with contract research organizations, contract manufacturing organizations and other third parties. Generally, these agreements provide for termination upon notice, with specified amounts due upon termination based on the timing of termination and the terms of the agreement. The amounts and timing of payments under these agreements are uncertain and contingent upon the initiation and completion of the services to be provided.

Future Funding Requirements

At December 31, 2022, we had an accumulated deficit of approximately $363.4 million. We expect to continue to incur losses for at least the next several years. We expect that our operating expenses will continue to increase for the foreseeable future as we continue the development of, and seek regulatory approval for, our product candidates. As a result, we will need significant additional capital to fund our operations. Our determination as to when we will seek additional capital and the amount of additional capital that we will need will be based on our evaluation of the progress we make in our research and development programs, changes to the scope and focus of those programs, changes in grant funding for certain of those programs, and projection of future costs, revenues, and rates of expenditure. If we are unable to raise additional capital when and as needed, we may be required to delay, postpone, or cancel our clinical trials or limit the number of clinical trial sites.

We may seek to obtain the additional capital we may need through one or more equity offerings, debt financings or other third-party funding, including potential strategic alliances and licensing or collaboration agreements. We cannot assure that adequate additional capital will be available on favorable terms, if at all. The issuance of additional securities, whether equity or debt, or the possibility of such issuance, may cause the market price of our common shares to decline, and the issuance of additional equity securities could result in the dilution of the interests of our current shareholders. If we obtain additional capital through strategic alliances and licensing or collaboration agreements, we may be required to relinquish rights to our intellectual property, our product candidates or otherwise agree to terms unfavorable to us. The unavailability or inadequacy of additional capital to meet future capital needs could force us to modify, curtail, delay, or suspend some or all aspects of our current planned operations. Our ability to raise additional capital may be adversely impacted by deteriorating global economic conditions and the disruptions to and volatility in the credit and financial markets in the United States and worldwide resulting from the ongoing pandemics, including the COVID-19 pandemic, the conflict in Ukraine, rising inflation and interest rates, and other macroeconomic factors.

We believe that our $57.9 million in cash, cash equivalents and marketable securities at December 31, 2022, provide sufficient liquidity to carry out our current planned operations (including after taking into account the amount we contributed to the settlement of the litigation discussed in Note 14 (Commitments and Contingencies) to the consolidated financial statements included in this report), through at least twelve months from the issuance date of our consolidated financial statements included elsewhere in this report. We believe we will meet our longer-term expected future cash requirements and obligations with our current cash and cash equivalents, milestone and other payments we expect to receive under our collaboration agreements, and proceeds we receive from sales under our at the market offering program.

Under rules and regulations of the SEC, as a smaller reporting company, we are not required to provide the information required by this item.

Evaluation of Disclosure Controls and Procedures

It is management’s responsibility to establish and maintain adequate internal control over all financial reporting pursuant to Rule 13a-15 under the Exchange Act. Our management, including our principal executive officer and our principal financial officer, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2022. Following this review and evaluation, management collectively determined that our disclosure controls and procedures were effective as of December 31, 2022 to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act: (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms; and (ii) is accumulated and communicated to management, including principal executive officer and our principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the fourth quarter of 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), is a process designed by, or under the supervision of, our principal executive officer, and our principal financial officer, and effected by our Board of Directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

• Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. The scope of management’s assessment of the effectiveness of internal control over financial reporting includes our consolidated subsidiaries.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2022, based on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management believes that, as of that date, our internal control over financial reporting was effective.