Business context and reporting period
Lineage Cell Therapeutics, Inc. (formerly BioTime, Inc.) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. The company is a clinical-stage cell-therapy developer. Its clinical programs include OpRegen for dry age-related macular degeneration, OPC1 for acute spinal cord injury, and VAC2 for non-small cell lung cancer. Lineage acquired the remaining interest in Asterias on March 8, 2019, adding OPC1 and VAC2. Renevia received a European CE Mark in September 2019; Lineage was seeking a European commercialization partner.
Financial results and liquidity
Amounts below are in millions of dollars except per-share data and percentages. The filing presents the financial statements as unaudited.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $0.567 | $0.982 | $2.274 | $4.230 |
| Gross profit | $0.453 | $0.947 | $1.985 | $3.980 |
| Gross margin | 79.9% | 96.4% | 87.3% | 94.1% |
| Operating expenses | $8.875 | $11.304 | $33.989 | $35.560 |
| Operating loss | $(8.422) | $(10.357) | $(32.004) | $(31.580) |
| Net income (loss) attributable to Lineage | $(16.505) | $66.725 | $(7.227) | $(1.038) |
| Basic and diluted EPS | $(0.11) | $0.53 | $(0.05) | $(0.01) |
Revenue was mainly grant revenue: $0.350 million in Q3 and $1.628 million year to date. At September 30, cash and cash equivalents were $14.366 million; marketable equity securities were $21.318 million. Management cited $35.7 million of cash, cash equivalents and marketable securities, working capital of $55.4 million, an accumulated deficit of $268.9 million, and shareholders’ equity of $115.5 million. Management believed available liquidity would fund planned operations for at least 12 months from the financial statements’ issuance date.
For the nine months, operating cash use was $26.424 million, investing cash provided was $16.237 million, and financing cash provided was $0.622 million. Cash, cash equivalents and restricted cash declined by $9.437 million to $14.962 million. Investing proceeds included sales of OncoCyte shares ($10.7 million), AgeX shares ($1.6 million), and HBL shares ($1.2 million), plus $3.1 million of cash acquired with Asterias.
Total liabilities were $17.459 million. Lease liabilities totaled approximately $5.313 million, including operating and finance leases. The filing does not identify material funded borrowings; the $23.238 million Juvenescence promissory note is an asset receivable, not company debt. The note bears 7% interest and is payable or convertible under specified terms at maturity on August 30, 2020.
Material changes versus comparable periods
- Q3 revenue declined 42%, primarily because grant revenue fell with the timing of grant activities. Nine-month revenue declined 46%, reflecting lower grant revenue and the absence of subscription and advertising revenue after AgeX was deconsolidated in August 2018.
- R&D expense declined 13% in Q3 and 16% year to date. The year-to-date comparison reflects the absence of AgeX-related spending after deconsolidation, partly offset by spending on Asterias programs acquired in March 2019.
- G&A expense fell 28% in Q3, but rose 11% year to date, primarily due to Asterias-merger-related severance, legal, accounting and other costs.
- Q3 2018 net income included a $78.5 million gain from AgeX’s deconsolidation; Q3 2019 instead reflected substantial unrealized investment losses. Thus, the sharp year-over-year change in quarterly net results is not a comparison of underlying operating performance alone.
- Lineage sold 6.25 million OncoCyte shares during 2019, reducing ownership from 28% to 16%; it then began accounting for the remaining holding as a marketable equity security. Shares outstanding increased to 149.790 million from 127.136 million at year-end 2018, mainly in connection with the Asterias merger.
Outlook, risks and unusual items
- Management estimated fourth-quarter 2019 spending of approximately $6 million and anticipated 2020 net operational spending of $16 million, compared with forecast 2019 spending of $34 million and combined 2018 spending of $43 million for Lineage and Asterias. These are management estimates, not guaranteed results.
- Management said additional financing may be needed if projected liquidity proves insufficient. Equity sales could dilute shareholders; reduced financing could require delaying or curtailing clinical trials or limiting trial sites. Marketable-security values and sale liquidity may fluctuate and may not be realized at reported values.
- Net results are exposed to volatility in the share prices of OncoCyte, AgeX and HBL. Q3 2019 included an $8.7 million unrealized OncoCyte loss and a $4.5 million unrealized loss on marketable equity securities; nine-month results included investment gains as well as losses.
- The Asterias purchase-price allocation was preliminary. It included $46.5 million of acquired in-process R&D and $13.0 million of deferred tax liability; Lineage said allocation revisions could be material.
- A Delaware shareholder class action filed in October 2019 challenges the Asterias merger. Lineage intended to defend the claims and had not accrued a liability because it considered loss possible but not probable or reasonably estimable. A prior related action was dismissed after a $0.2 million attorneys’ fee settlement.
- Clinical development, regulatory approval, manufacturing, grant funding, intellectual-property protection, integration of Asterias and retention of key personnel remain risks. Lineage reported no material changes to the risk factors in its 2018 Form 10-K.
Important facts for investors to verify
- Whether actual cash burn and marketable-security sale proceeds support management’s stated 12-month liquidity assessment and 2020 spending outlook.
- The collectability and ultimate cash or equity settlement of the Juvenescence note, including its August 2020 maturity and conversion conditions.
- Final Asterias purchase accounting, including the valuation and impairment sensitivity of OPC1, VAC2 and goodwill.
- Clinical-trial progress, funding and timelines for OpRegen, OPC1 and VAC2, and whether Renevia secures a commercialization partner.
- Subsequent developments in the Asterias merger litigation, and the potential effects of further share issuance, outstanding options and warrants on dilution.