ITEM 1A. RISK FACTORS
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.
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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:
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.
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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.
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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:
● the timing and outcome of regulatory review of our product candidates;
● 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.
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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.
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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;
● the loss or impairment of intellectual property rights related to OpRegen.
If
Roche terminates the collaboration:
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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.
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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:
● retention of key employees from an acquired business or company;
● unanticipated write-offs or charges; and
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.
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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.
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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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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.
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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:
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.
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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.
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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.
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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:
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.
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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:
● 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.
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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