Lineage Cell Therapeutics, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Lineage is a clinical-stage cell therapy company; its principal programs are OpRegen for dry age-related macular degeneration, OPC1 for acute spinal cord injury, and VAC2 for non-small cell lung cancer. All amounts below are in U.S. dollars; financial statement figures are in thousands unless otherwise noted.
Key financial results and liquidity
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Total revenue | $514 | $928 | Down 45%, mainly from lower grant revenue |
| Gross profit | $420 | $860 | Gross margin approximately 82% versus 93% |
| Research and development expense | $3,339 | $4,961 | Down 33% |
| General and administrative expense | $4,519 | $8,660 | Down 48% |
| Operating loss | $(7,438) | $(12,761) | Loss narrowed by $5.3 million |
| Net loss attributable to Lineage | $(8,399) | Net income $39,310 | 2019 included large noncash investment remeasurement gains |
| Basic and diluted EPS | $(0.06) | $0.30 | 2020 loss made potential shares antidilutive |
| Cash used in operating activities | $(5,026) | $(9,314) | Use decreased by $4.3 million |
At March 31, 2020, cash and cash equivalents were $9.8 million and marketable equity securities were $15.9 million. Management cited $25.8 million in cash, cash equivalents and marketable securities as sufficient to fund planned operations for at least 12 months from issuance of the financial statements. Working capital was $45.3 million, including a $24.0 million Juvenescence promissory note due August 30, 2020. Total assets were $118.9 million and total liabilities were $14.1 million. The filing reports lease liabilities, but no conventional borrowing outstanding at quarter-end. Cash, cash equivalents and restricted cash totaled $10.4 million at quarter-end, up $0.3 million from year-end.
The $23.994 million note receivable from Juvenescence bears 7% interest. It is payable in cash at maturity unless converted under specified financing terms or, in some circumstances, at Lineage’s election. The note’s ultimate repayment or conversion was unresolved in the filing.
Material changes and management commentary
- Revenue fell 45%, primarily because grant revenue declined $401,000, reflecting timing of grant-related activities. Royalties and license fees increased, but research product and service sales were zero in Q1 2020.
- R&D expense declined $1.6 million. OpRegen and other ophthalmic spending decreased $1.8 million, mainly due to less manufacturing activity; OPC1 spending rose $0.6 million as development and manufacturing activity increased.
- G&A expense fell $4.1 million, primarily from lower Asterias-related costs and reduced compensation, accounting and other expenses. Lower expenses reflect cost-saving measures, including headcount and nonclinical spending reductions; management expected lower operational spending in 2020 than in prior periods.
- Q1 2020 included a $1.3 million gain on sales of marketable securities and a $1.3 million unrealized loss on those securities. Q1 2019 included $44.5 million of gains from remeasurement of OncoCyte and Asterias investments and a $4.4 million deferred tax benefit; these items materially distort the year-over-year net-income comparison.
- OncoCyte holdings were valued at $14.8 million at March 31, 2020; Lineage also held AgeX and HBL securities. Management warned that investment values fluctuate with share prices and may not be fully realizable at quoted prices.
Outlook, risks and subsequent events
- COVID-19 had disrupted enrollment in the OpRegen and VAC2 trials, with some sites pausing enrollment and some patients not enrolling or continuing. The duration and effect of delays were uncertain. Management said it might increase spending later in 2020 to accelerate trial activity.
- Lineage expects operating losses to continue. It cautioned that financing may be needed and that inability to obtain adequate funding could lead to delayed, curtailed or cancelled trials. Market volatility could also affect the value and saleability of its securities holdings.
- In April 2020, Lineage received a $523,000 Paycheck Protection Program loan at 1% interest, with a two-year term; forgiveness was not assured. In April, it also entered a sublease expected to generate $28,000 monthly base rent, subject to its terms.
- Lineage sold additional OncoCyte shares for net proceeds of $3.7 million on April 23, 2020. On May 6, it assumed obligations and exercised an option concerning the VAC2 trial data, agreeing to a £1.25 million license signature fee payable in installments, plus potential development and sales milestones and royalties.
- On May 1, 2020, Lineage filed a new shelf registration and sales agreement permitting up to $25 million of at-the-market common stock sales, subject to conditions. Issuance could dilute existing shareholders.
- A Delaware putative shareholder class action concerning the Asterias merger remained pending. Lineage denied the allegations; it had not accrued a liability because it considered loss possible but not probable or estimable. A separate earlier action was dismissed after a $200,000 attorneys’ fee resolution.
- Other material risks include clinical and regulatory failure, manufacturing and supply constraints, intellectual-property disputes, dependence on third parties and grants, and potential limitations on use of tax attributes. Management reported disclosure controls and procedures were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Juvenescence pays or converts the approximately $24.0 million note at its August 30, 2020 maturity, and how proceeds affect liquidity.
- Whether management’s 12-month liquidity assessment remains supportable after considering COVID-19 trial delays, marketable-security volatility, and planned spending.
- Updated enrollment, trial timelines and clinical data for OpRegen, OPC1 and VAC2, including the impact of COVID-19 disruptions.
- Any share sales under the new $25 million at-the-market facility, including proceeds and dilution, and the final treatment of the PPP loan.
- Developments in the Asterias merger litigation and the VAC2 license obligations, including deferred fees, future milestones and royalties.