| Basis of Presentation, Liquidity and Summary of Significant Accounting Policies | 2. Basis
of Presentation, Liquidity and Summary of Significant Accounting Policies The unaudited condensed
consolidated interim financial statements presented herein, and discussed below, have been prepared in accordance with GAAP for
interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. In accordance with those
rules and regulations certain information and footnote disclosures normally included in comprehensive consolidated financial statements
have been condensed or omitted. The condensed consolidated balance sheet as of December 31, 2018 was derived from the audited consolidated
financial statements at that date, but does not include all the information and footnotes required by GAAP. These condensed consolidated
interim financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto
included in Lineage’s Annual Report on Form 10-K for the year ended December 31, 2018. The accompanying condensed
consolidated interim financial statements, in the opinion of management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of Lineage’s financial condition and results of operations. The condensed
consolidated results of operations are not necessarily indicative of the results to be expected for any other interim period or
for the entire year. Principles of consolidation Lineage’s condensed
consolidated interim financial statements include the accounts of its subsidiaries. The following table reflects Lineage’s
ownership, directly or through one or more subsidiaries, of the outstanding shares of its operating subsidiaries as of September
30, 2019.
Subsidiary Field of Business Lineage Ownership Country
Asterias BioTherapeutics, Inc. Cell therapy clinical development programs in spinal cord injury and oncology 100% USA
Cell Cure Neurosciences Ltd. (“Cell Cure”) Products to treat age-related macular degeneration 99% (1) Israel
ES Cell International Pte. Ltd. (“ESI”) Stem cell products for research, including clinical grade cell lines produced under cGMP 100% Singapore
OrthoCyte Corporation (“OrthoCyte”) Developing bone grafting products for orthopedic diseases and injuries 99.8% USA
(1) Includes shares owned by Lineage and ESI. For the three and nine
months ended September 30, 2018, Lineage’s unaudited consolidated results include AgeX’s consolidated results for the
period through August 30, 2018. As a result of the AgeX Deconsolidation, beginning on August 30, 2018 (a) AgeX’s consolidated
financial statements and consolidated results are no longer a part of Lineage’s condensed consolidated interim financial
statements and results, and (b) the fair value of AgeX common stock held by Lineage is now reflected on Lineage’s condensed
consolidated balance sheet and the changes in the fair value of those shares during the applicable reporting period are reflected
as gains or losses in Lineage’s condensed consolidated statements of operations included in other income and expenses, net. All material intercompany
accounts and transactions have been eliminated in consolidation. As of September 30, 2019, Lineage consolidated its direct and
indirect wholly owned or majority-owned subsidiaries because Lineage has the ability to control their operating and financial decisions
and policies through its ownership, and the noncontrolling interest is reflected as a separate element of shareholders’ equity
on Lineage’s consolidated balance sheets. Liquidity Since inception, Lineage
has incurred significant operating losses and has funded its operations primarily through the issuance of equity securities, sale
of common stock of AgeX, a former subsidiary, receipt of research grants, royalties from product sales, license revenues and sales
of research products. Additionally, Lineage raised $10.7 million in sales of a portion of its OncoCyte holdings, $1.6 million in
sales of a portion of its AgeX holdings and $1.2 million in sales of a portion of its Hadasit Bio-Holdings Ltd. (“HBL”)
holdings in the third quarter of 2019. At September 30, 2019, Lineage had an accumulated deficit of approximately $268.9 million,
working capital of $55.4 million and shareholders’ equity of $115.5 million. Lineage has evaluated its projected cash flows
and believes that its $35.7 million of cash, cash equivalents and marketable equity securities, including its positions in OncoCyte,
AgeX and HBL, at September 30, 2019, provide sufficient cash, cash equivalents, and liquidity to carry out Lineage’s current
planned operations through at least twelve months from the issuance date of the consolidated financial statements included herein.
If Lineage needs near term working capital or liquidity to supplement its cash and cash equivalents for its operations, Lineage
may sell some, or all, of its marketable equity securities, as necessary. If the promissory note
issued by Juvenescence in favor of Lineage discussed in Note 5 is converted into equity securities of Juvenescence prior to its
maturity date, the Juvenescence equity securities may be marketable securities that Lineage may use to supplement its liquidity,
as needed. If such promissory note is not converted, it is payable in cash, plus accrued interest, at maturity on August 30, 2020. On March 8, 2019, with
the consummation of the Asterias Merger, Asterias became Lineage’s wholly owned subsidiary. Lineage began consolidating Asterias’
operations and results with its operations and results beginning on March 8, 2019 (see Note 3). As Lineage integrates Asterias’
operations into its own, Lineage has made extensive reductions in headcount and reduced non-clinical related spend, in each case,
as compared to Asterias’ operations before the Asterias Merger. Lineage’s projected
cash flows are subject to various risks and uncertainties, and the unavailability or inadequacy of financing to meet future capital
needs could force Lineage to modify, curtail, delay, or suspend some or all aspects of its planned operations. Lineage’s
determination as to when it will seek new financing and the amount of financing that it will need will be based on Lineage’s
evaluation of the progress it makes in its research and development programs, any changes to the scope and focus of those programs,
any changes in grant funding for certain of those programs, and projection of future costs, revenues, and rates of expenditure.
Lineage may be required to delay, postpone, or cancel clinical trials or limit the number of clinical trial sites, unless it is
able to obtain adequate financing. In addition, Lineage has incurred and expects to continue incurring significant costs in connection
with the acquisition of Asterias and with integrating its operations. Lineage may incur additional costs to maintain employee morale
and to retain key employees. Lineage cannot assure that adequate financing will be available on favorable terms, if at all. Sales
of additional equity securities by Lineage or its subsidiaries and affiliates could result in the dilution of the interests of
current shareholders. Business Combinations Lineage accounts for business
combinations, such as the Asterias Merger completed in March 2019, in accordance with ASC Topic 805, which requires the purchase
price to be measured at fair value. When the purchase consideration consists entirely of shares of Lineage’s common stock,
Lineage calculates the purchase price by determining the fair value, as of the acquisition date, of shares issued in connection
with the closing of the acquisition. Lineage recognizes estimated fair values of the tangible assets and intangible assets acquired,
including in-process research and development (“IPR&D”), and liabilities assumed as of the acquisition date, and
records as goodwill any amount of the fair value of the tangible and intangible assets acquired and liabilities assumed in excess
of the purchase price. Marketable Equity Securities Lineage accounts for the
shares it holds in OncoCyte, AgeX and HBL as marketable equity securities in accordance with ASC 320-10-25, Investments
– Debt and Equity Securities Financial
Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, . The OncoCyte and AgeX
shares have readily determinable fair values quoted on the NYSE American under trading symbols “OCX” and “AGE”.
The HBL shares have a readily determinable fair value quoted on the Tel Aviv Stock Exchange (“TASE”) under trading
symbol “HDST” where share prices are denominated in New Israeli Shekels (NIS). Accordingly, the marketable equity securities
are considered level 1 assets as defined by ASC 820. These securities are held principally to meet future working capital needs.
These securities are measured at fair value and reported as current assets on the consolidated balance sheets based on the closing
trading price of the security as of the date being presented. Prior to September 11,
2019, Lineage accounted for its OncoCyte shares held at fair value, using the equity method of accounting. On September 11, 2019,
Lineage’s ownership percentage decreased from 24% to 16% when it sold 4.0 million shares of OncoCyte common stock. Accordingly,
as the ownership percentage is less than 20%, Lineage is no longer considered to exercise significant influence over OncoCyte and
is now accounting for its OncoCyte holdings as marketable equity securities. Prior to the Asterias
Merger completed on March 8, 2019 discussed in Note 3, Lineage accounted for its Asterias shares held at fair value, using the
equity method of accounting. Revenue Recognition During the first quarter
of 2018, Lineage adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) ASU
2014-09, Revenues from Contracts with Customers (Topic 606) Lineage recognizes revenue
in a manner that depicts the transfer of control of a product or a service to a customer and reflects the amount of the consideration
it is entitled to receive in exchange for such product or service. In doing so, Lineage follows a five-step approach: (i) identify
the contract with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price,
(iv) allocate the transaction price to the performance obligations, and (v) recognize revenue when (or as) the customer obtains
control of the product or service. Lineage considers the terms of a contract and all relevant facts and circumstances when applying
the revenue recognition standard. Lineage applies the revenue recognition standard, including the use of any practical expedients,
consistently to contracts with similar characteristics and in similar circumstances. Lineage’s largest
source of revenue is currently related to government grants. In applying the provisions of ASU 2014-09, Lineage has determined
that government grants are out of the scope of ASU 2014-09 because the government entities do not meet the definition of a “customer”,
as defined by ASU 2014-09, as there is not considered to be a transfer of control of good or services to the government entities
funding the grant. Lineage has, and will continue to, account for grants received to perform research and development services
in accordance with ASC 730-20, Research and Development Arrangements Deferred grant revenues
represent grant funds received from the governmental funding agencies for which the allowable expenses have not yet been incurred
as of the balance sheet date reported. As of September 30, 2019, deferred grant revenue was $182,000. Basic and diluted net
income (loss) per share attributable to common shareholders Basic earnings per share
is calculated by dividing net income or loss attributable to Lineage common shareholders by the weighted average number of common
shares outstanding, net of unvested restricted stock or restricted stock units, subject to repurchase by Lineage, if any, during
the period. Diluted earnings per share is calculated by dividing the net income or loss attributable to Lineage common shareholders
by the weighted average number of common shares outstanding, adjusted for the effects of potentially dilutive common shares issuable
under outstanding stock options and warrants, using the treasury-stock method, convertible preferred stock, if any, using the if-converted
method, and treasury stock held by subsidiaries, if any. For the three and nine
months ended September 30, 2019, and for the nine months ended September 30, 2018, Lineage reported a net loss attributable to
common shareholders, and therefore, all potentially dilutive common stock was considered antidilutive for those periods. For the
three months ended September 30, 2018, Lineage reported net income attributable to common shareholders, and therefore, performed
an analysis of common share equivalents to determine their impact on diluted net income, and determined that none of the common
share equivalents were dilutive. The following weighted
average common share equivalents were excluded from the computation of diluted net income (loss) per common share for the periods
presented because including them would have been antidilutive (in thousands):
Three Months Ended September 30, (unaudited)
Nine Months Ended September 30, (unaudited)
2019 2018 2019 2018
Stock options 15,941 9,742 15,332 9,301
Warrants (1) - 8,795 - 9,138
Lineage Warrants (2) 1,090 - 975 -
Restricted stock units 236 83 277 286
(1) The warrants expired on October 1, 2018.
(2) Although the Lineage Warrants are classified as liabilities, these warrants are considered for dilutive earnings per share calculations in accordance with ASC 260, Earnings Per Share Lease accounting and
impact of adoption of the new lease standard On January 1, 2019, Lineage
adopted ASU 2016-02, Leases Codification Improvements to Topic 842, Leases, Leases (Topic 842):
Targeted improvements, Lineage management determines
if an arrangement is a lease at inception. Leases are classified as either financing or operating, with classification affecting
the pattern of expense recognition in the consolidated statements of operations. When determining whether a lease is a finance
lease or an operating lease, ASC 842 does not specifically define criteria to determine “major part of remaining economic
life of the underlying asset” and “substantially all of the fair value of the underlying asset.” For lease classification
determination, Lineage continues to use (i) greater to or equal to 75% to determine whether the lease term is a major part of the
remaining economic life of the underlying asset and (ii) greater to or equal to 90% to determine whether the present value of the
sum of lease payments is substantially all of the fair value of the underlying asset. Under the available practical expedients,
Lineage accounts for the lease and non-lease components as a single lease component. Lineage recognizes right-of-use (“ROU”)
assets and lease liabilities for leases with terms greater than twelve months in the condensed consolidated balance sheet. ROU assets represent Lineage’s
right to use an underlying asset during the lease term and lease liabilities represent Lineage’s obligation to make lease
payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present
value of lease payments over the lease term. As most of Lineage’s leases do not provide an implicit rate, Lineage uses its
incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.
Lineage uses the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and
excludes lease incentives. Lineage’s lease terms may include options to extend or terminate the lease when it is reasonably
certain that Lineage will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the
lease term. Operating leases are included
as right-of-use assets in property and equipment (see Note 7), and ROU lease liabilities, current and long-term, in the condensed
consolidated balance sheets. Financing leases are included in property and equipment, and in financing lease liabilities, current
and long-term, in Lineage’s condensed consolidated balance sheets. In connection with the
adoption on ASC 842 on January 1, 2019, Lineage derecognized net book value of leasehold improvements and corresponding lease liabilities
of $1.9 million and $2.0 million, respectively, which was the carrying value of certain operating leases as of December 31, 2018,
included in property and equipment and lease liabilities, respectively, recorded pursuant to build to suit lease accounting under
the previous ASC 840 lease standard. The derecognition of these amounts from the superseded ASC 840 lease standard was offset by
a cumulative effect adjustment of $0.1 million as a reduction of Lineage’s accumulated deficit on January 1, 2019. These
build to suit leases were primarily related to the Alameda and the Cell Cure Leases described in Note 15. ASC 842 requires build
to suit leases recognized on Lineage’s consolidated balance sheets as of December 31, 2018 to be derecognized upon the adoption
of the new lease standard and be recognized in accordance with the new standard on January 1, 2019. The adoption of ASC 842
had a material impact in Lineage’s consolidated balance sheets, with the most significant impact resulting from the recognition
of ROU assets and lease liabilities for operating leases with remaining terms greater than twelve months on the adoption date (see
Note 15). Lineage’s accounting for financing leases (previously referred to as “capital leases”) remained substantially
unchanged. Other recently adopted
accounting pronouncements Adoption of ASU 2016-18 Statement
of Cash Flows (Topic 230) Statement of Cash Flows (Topic 230):
Restricted Cash The following table provides
a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheet dates
that comprise the total of the same such amounts shown in the condensed consolidated statements of cash flows for all periods presented
herein and effected by the adoption of ASU 2016-18 (in thousands):
September 30, 2019
December 31, 2018
September 30, 2018
December 31, 2017
(unaudited) (unaudited)
Cash and cash equivalents $ 14,366 $ 23,587 $ 19,467 $ 36,838
Restricted cash included in prepaid expenses and other current assets (see Note 15) - 346 424 -
Restricted cash included in deposits and other long-term assets (see Note 15) 596 466 396 847
Total cash, cash equivalents, and restricted cash as shown in the condensed consolidated statements of cash flows $ 14,962 $ 24,399 $ 20,287 $ 37,685 Adoption of ASU 2018-07,
Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting - Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment
Accounting Recently Issued Accounting
Pronouncements Not Yet Adopted In August 2018, the FASB
issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for
Fair Value Measurement In June 2016, the FASB
issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments |
