BIOTIME, INC. AND SUBSIDIARIES
See accompanying notes to the condensed consolidated interim financial statements.
See accompanying notes to the condensed consolidated interim financial statements.
See accompanying notes to the condensed consolidated interim financial statements.
See accompanying notes to the condensed consolidated interim financial statements.
NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
1.
|
Organization and Business Overview
|
General –
BioTime is a clinical-stage biotechnology company focused on developing and commercializing products addressing degenerative diseases. BioTime’s clinical programs are based on two platform technologies. The foundation of BioTime’s core therapeutic technology platform is pluripotent cells that are capable of becoming any of the cell types in the human body. The foundation of BioTime’s cell delivery platform is its
HyStem
®
3-D cell and drug delivery matrix technology. BioTime’s current clinical programs are targeting three primary sectors, aesthetics, ophthalmology and cell/drug therapeutics delivery.
BioTime also has significant equity holdings in two publicly traded companies, Asterias Biotherapeutics, Inc. ("Asterias") and OncoCyte Corporation ("OncoCyte"), which BioTime founded and, until recently, were majority-owned and consolidated subsidiaries. Asterias (NYSE MKT: AST) is presently focused on advancing three clinical-stage programs that have the potential to address areas of high unmet medical need in the fields of neurology (spinal cord injury) and oncology (acute myeloid leukemia and lung cancer). OncoCyte (NYSE MKT: OCX) is developing confirmatory diagnostic tests for lung cancer, breast cancer, and bladder cancer utilizing novel liquid biopsy technology.
BioTime also seeks to advance early-stage programs using other new technologies through its own research programs as well as through other subsidiaries or affiliates.
As discussed in Note 3, as a result of the issuance of 625,000 shares of OncoCyte common stock from warrant exercises by certain OncoCyte shareholders, as of February 17, 2017, BioTime owned less than 50% of the OncoCyte outstanding common stock and experienced a loss of control of OncoCyte
in accordance with accounting principles generally accepted in the United States (“GAAP”)
. Under GAAP, loss of control of a subsidiary is deemed to have occurred when, among other things, a parent company owns less than a majority of the outstanding common stock of the subsidiary, lacks a controlling financial interest in the subsidiary, and is unable to unilaterally control the subsidiary through other means such as having the ability or being able to obtain the ability to elect a majority of the subsidiary’s Board of Directors. BioTime determined that all of these loss of control factors were present with respect to OncoCyte on February 17, 2017. Accordingly, BioTime has deconsolidated OncoCyte’s financial statements and results of operations from BioTime, effective February 17, 2017 (the “OncoCyte Deconsolidation”), in accordance with Accounting Standards Codification, or ASC 810-10-40-4(c),
Consolidation
.
Since February 17, 2017
, BioTime has accounted for the OncoCyte common stock it holds using the equity method of accounting at fair value (see Note 4).
Beginning on May 13, 2016, BioTime also deconsolidated Asterias financial statements and results of operations from BioTime (the “Asterias Deconsolidation”) (see Notes 3 and 5).
2.
|
Basis of Presentation, Liquidity and Summary of Significant Accounting Policies
|
The unaudited condensed consolidated 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 10 of Regulation S-X of the Securities Exchange Commission. In accordance with those rules and regulations certain information and footnote disclosures normally included in comprehensive consolidated financial statements have been condensed or omitted pursuant to such rules and regulations. The consolidated balance sheet as of December 31, 2016 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 financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in BioTime’s Annual Report on Form 10-K for the year ended December 31, 2016.
The accompanying interim condensed consolidated financial statements, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of BioTime’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 –
BioTime’s consolidated financial statements present the operating results of all of its wholly-owned and majority-owned subsidiaries that it consolidates as required under GAAP. All material intercompany accounts and transactions have been eliminated in consolidation. BioTime consolidated ReCyte Therapeutics, Inc. (“ReCyte”), OrthoCyte Corporation (“OrthoCyte”), ES Cell International, Pte Ltd (“ESI”), Cell Cure Neurosciences, Ltd (“Cell Cure”), BioTime Asia, Limited (“BioTime Asia”), LifeMap Sciences, Inc. (“LifeMap Sciences”) LifeMap Sciences, Ltd., and LifeMap Solutions, Inc., as BioTime has the ability to control their operating and financial decisions and policies through its ownership, and the non-controlling interest is reflected as a separate element of shareholders' equity on BioTime’s condensed consolidated balance sheets.
Although beginning on February 17, 2017 and May 13, 2016, respectively, OncoCyte and Asterias financial statements and results is no longer a part of BioTime’s consolidated financial statements and results, the market value of OncoCyte and Asterias common stock, as of those respective dates, held by BioTime is reflected on BioTime’s consolidated balance sheet
and the subsequent changes
in the market value of those shares will be reflected in BioTime’s
consolidated balance sheet and
consolidated statements of operations, allowing BioTime shareholders to evaluate the value of the respective OncoCyte and Asterias’ portion of BioTime’s business.
For the period from January 1, 2017 through February 16, 2017, OncoCyte’s results of operations, comprehensive income or loss, and cash flows are included with BioTime’s consolidated statement of operations, statement of comprehensive income or loss and statement of cash flows for the three months ended March 31, 2017, after intercompany eliminations (see Notes 3 and 4).
For the three months ended March 31, 2016, Asterias’ and OncoCyte’s results of operations, comprehensive income or loss and cash flows are included with BioTime’s consolidated statement of operations, statement of comprehensive income or loss and statement of cash flows, after intercompany eliminations (sees Notes 3, 4 and 5).
As of December 31, 2016, OncoCyte’s assets, liabilities and net assets are included in the consolidated balance sheet of BioTime, after intercompany eliminations.
Liquidity –
Since inception, BioTime has incurred significant operating losses and has funded its operations primarily through the issuance of equity securities, payments from research grants, royalties from product sales and sales of research products and services. At March 31, 2017, BioTime had an accumulated deficit of approximately $147 million, working capital of $20.4 million and shareholders’ equity of $190 million. BioTime has evaluated its projected cash flows and believes that its $24.7 million of cash, cash equivalents, available for sale securities and the shares of Asterias and OncoCyte, with a combined value of $161.3 million at March 31, 2017, and which may be sold in part or in their entirety, provide
sufficient cash, cash equivalents, and liquidity to carry out BioTime’s current operations through at least twelve months from the issuance date of the consolidated financial statements included herein.
Although BioTime has no present plans to liquidate its holdings of Asterias or OncoCyte shares, if BioTime needs near term working capital or liquidity to supplement its cash and cash equivalents for its operations, BioTime may sell some, or all, of its Asterias or OncoCyte shares, as necessary.
BioTime’s projected cash flows are subject to various risks and uncertainties. For example, clinical trials being conducted by Cell Cure will be funded in part with funds from grants and not from cash on hand. If Cell Cure were to lose its grant funding or BioTime is unable to continue to provide working capital to Cell Cure, or both, it may be required to delay, postpone, or cancel its clinical trials or limit the number of clinical trial sites, or otherwise reduce or curtail its operations unless it is able to obtain adequate financing from another source that could be used for its clinical trial. The unavailability or inadequacy of financing to meet future capital needs could force BioTime to modify, curtail, delay, or suspend some or all aspects of its planned operations. BioTime’s determination as to when it will seek new financing and the amount of financing that it will need will be based on BioTime’s evaluation of the progress it makes in its research and development programs, any changes to the scope and focus of those programs, and projection of future costs, revenues, and rates of expenditure. BioTime cannot assure that adequate financing will be available on favorable terms, if at all.
Sales of additional equity securities by BioTime or its subsidiaries could result in the dilution of the interests of present shareholders.
Equity method accounting for Asterias and OncoCyte, at fair value –
BioTime uses the equity method of accounting when it has the ability to exercise significant influence, but not control, as determined in accordance with GAAP, over the operating and financial policies of a company. For equity method assets which BioTime has elected to measure at fair value, unrealized gains and losses are reported in the consolidated statements of operations in other income (expenses), net.
As further discussed in Notes 4 and 5, BioTime has elected to account for its Asterias and OncoCyte shares at fair value using the equity method of accounting because beginning on May 13, 2016 and February 17, 2017, the respective dates on which BioTime deconsolidated Asterias and OncoCyte, BioTime has not had control of Asterias and OncoCyte, as defined by GAAP, but continues to exercise significant influence over Asterias and OncoCyte. Under the fair value method, BioTime’s value in shares of common stock it holds in Asterias and OncoCyte is marked to market using the closing prices of Asterias and OncoCyte common stock on the NYSE MKT multiplied by the number of shares of Asterias and OncoCyte held by BioTime, with changes in the fair value of the Asterias and OncoCyte shares included in other income/expenses, net, in the condensed consolidated statements of operations. The Asterias and OncoCyte shares are considered level 1 assets as defined by ASC 820,
Fair Value Measurements and Disclosures
.
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 BioTime common shareholders by the weighted average number of common shares outstanding, net of unvested restricted stock or restricted stock units, subject to repurchase by BioTime, if any, during the period. Diluted earnings per share is calculated by dividing the net income or loss attributable to BioTime 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.
The primary components of the weighted average number of potentially dilutive common shares used to compute diluted net income per common share for the three months ended March 31, 2017 were approximately 330,000 shares of treasury stock (see Note 10), and approximately 342,000 restricted stock units and outstanding stock options (see Note 11). For the three months ended March 31, 2016, there were no potentially dilutive common share equivalents due to the net loss reported for this period presented.
The following 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 March 31,
(unaudited)
|
|
|
2017
|
|
2016
|
Stock options
|
|
|
4,701
|
|
|
|
5,454
|
|
Warrants
|
|
|
9,395
|
|
|
|
9,395
|
|
Treasury stock
|
|
|
--
|
|
|
|
4,473
|
|
Adoption of ASU 2016-09
,
Improvements to Employee Share-Based Payment Accounting
In March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
, which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows. BioTime adopted ASU 2016-09 beginning on January 1, 2017.
In connection with the adoption of ASU 2016-09, BioTime changed its accounting policies including how it accounts for excess tax benefits and deficiencies, if any, and forfeitures, as applicable. All excess tax benefits and tax deficiencies from stock based compensation awards accounted for under ASC 718 are recognized as an income tax benefit or expense, respectively, in the consolidated statements of operations. Prior to the adoption of ASU 2016-09, BioTime recognized excess tax benefits, if any, in additional paid-in capital only if the tax deduction reduced cash income taxes payable and, excess tax deficiencies were recognized either as an offset to accumulated excess tax benefits, if any, on BioTime’s consolidated statements of operations. An excess income tax benefit arises when the tax deduction of a share-based award for income tax purposes exceeds the compensation cost recognized for financial reporting purposes and, a tax deficiency arises when the compensation cost exceeds the tax deduction. Because BioTime has an insignificant number of stock option exercises during the current quarter, and BioTime’s full valuation allowance prior to March 31, 2017, the impact to BioTime’s consolidated statements of operations for any excess tax benefits or deficiencies was immaterial (see Notes 11 and 12).
Forfeitures are now accounted for as they occur instead of based on the number of awards that were expected to vest. Based on the nature and timing of BioTime’s grants, straight line expense attribution of stock based compensation for the entire award and the relatively low forfeiture rates on BioTime’s experience, the impact of adoption of ASU 2016-09 pertaining to forfeitures was not material to BioTime’s consolidated financial statements.
Recently Issued Accounting Pronouncements
– The following accounting standards, which are not yet effective, are presently being evaluated by BioTime to determine the impact that they might have on its consolidated financial statements. The below recently issued accounting pronouncements should be read in conjunction with the recently issued accounting pronouncements, as applicable and disclosed in BioTime’s Annual Report on Form 10-K for the year ended December 31, 2016.
In November 2016, the FASB issued ASU 2016-18, “
Statement of Cash Flows (Topic 230)
”, which require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, the amounts described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows. ASU 2016-18 does not provide a definition of restricted cash or restricted cash equivalents. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, and interim reporting periods within those fiscal years. Early adoption is permitted. BioTime believes the adoption of ASU 2016-18 will not have a material impact on its consolidated financial statements.
Reclassifications –
For the three months ended March 31, 2016, BioTime reclassified $77,000 from subscription and advertisement revenues to royalties from product sales to conform to the presentation for the three months ended March 31, 2017. The reclassifications had no impact on total revenues, loss from operations or net loss, as reported.
3.
|
Deconsolidation of OncoCyte and Asterias
|
On February 17, 2017, OncoCyte issued 625,000 shares of OncoCyte common stock to certain investors who exercised their OncoCyte warrants. These warrants had been issued as part of OncoCyte’s financing that was completed on August 29, 2016. As a result of this exercise and the issuance of the 625,000 shares of OncoCyte common stock, beginning on February 17, 2017, BioTime owned less than 50% of the OncoCyte outstanding common stock and experienced a loss of control of the OncoCyte subsidiary. Under GAAP, loss of control of a subsidiary is deemed to have occurred when, among other things, a parent company owns less than a majority of the outstanding common stock of the subsidiary, lacks a controlling financial interest in the subsidiary, and is unable to unilaterally control the subsidiary through other means such as having the ability or being able to obtain the ability to elect a majority of the subsidiary’s Board of Directors. BioTime determined that all of these loss of control factors were present with respect to OncoCyte on February 17, 2017. Accordingly, BioTime has deconsolidated OncoCyte’s financial statements and results of operations from BioTime, effective February 17, 2017, in accordance with ASC, 810-10-40-4(c),
Consolidation
, referred to as the “OncoCyte Deconsolidation”.
Beginning on February 17, 2017, BioTime is accounting for its retained noncontrolling investment in OncoCyte under the equity method of accounting and has elected the fair value option under ASC 825-10,
Financial Instruments
(see Note 4).
In connection with the OncoCyte Deconsolidation and in accordance with ASC 810-10-40-5, BioTime recorded a gain on deconsolidation of $71.7 million during the three months ended March 31, 2017, included in other income and expenses, net, in the condensed consolidated statements of operations (see Note 12).
As previously reported, BioTime deconsolidated Asterias financial statements and results of operations from BioTime effective May 13, 2016.
4
.
|
Equity Method Accounting for Common Stock of OncoCyte, at fair value
|
BioTime elected to account for its
14.7 million shares of OncoCyte common stock
at fair value using the equity method of accounting beginning on February 17, 2017, the date of the OncoCyte Deconsolidation. The OncoCyte shares had a fair value of $87.3 million as of March 31, 2017 and a fair value of $71.2 million as of February 17, 2017, based on the closing price of OncoCyte common stock on the NYSE MKT of $5.95 per share and $4.85 per share on those respective dates. For the three months ended March 31, 2017, BioTime recorded an unrealized gain of $16.1 million on the OncoCyte shares due to the increase in OncoCyte's stock price from February 17, 2017 to March 31, 2017 (see Note 12).
The unaudited condensed results of operations for the three months ended March 31, 2017 and 2016, the unaudited condensed balance sheet information of OncoCyte at March 31, 2017 and the audited balance sheet information of OncoCyte at December 31, 2016 are summarized below (in thousands):
|
|
January 1, 2017 to
February 16, 2017
(unaudited)
|
|
February 17, 2017
to March 31, 2017
(unaudited)
|
|
Three Months Ended
March 31, 2016
(unaudited)
|
Condensed Statements of Operations
(1)
:
|
|
|
|
|
|
|
|
|
|
Research and development expense
|
|
$
|
798
|
|
|
$
|
1,049
|
|
|
$
|
1,835
|
|
General and administrative expense
|
|
|
590
|
|
|
|
2,093
|
|
|
|
1,751
|
|
Loss from operations
|
|
|
(1,388
|
)
|
|
|
(3,142
|
)
|
|
|
(3,586
|
)
|
Net loss
|
|
$
|
(1,932
|
)
|
|
$
|
(3,311
|
)
|
|
$
|
(3,582
|
)
|
|
|
March 31, 2017
(unaudited)
|
|
December 31, 2016
|
Condensed Balance Sheet information
(2)
:
|
|
|
|
|
|
|
Current assets
|
|
$
|
13,452
|
|
|
$
|
10,459
|
|
Noncurrent assets
|
|
|
1,722
|
|
|
|
1,751
|
|
|
|
$
|
15,174
|
|
|
$
|
12,210
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
4,549
|
|
|
$
|
1,421
|
|
Noncurrent liabilities
|
|
|
1,852
|
|
|
|
310
|
|
Stockholders’ equity
|
|
|
8,773
|
|
|
|
10,479
|
|
|
|
$
|
15,174
|
|
|
$
|
12,210
|
|
(1)
The condensed unaudited statements of operations information included in the table above for the period January 1, 2017 through February 16, 2017, and for the three months ended March 31, 2016, reflects OncoCyte results of operations included in BioTime’s consolidated statements of operations for the three months ended March 31, 2017 and 2016, respectively, after intercompany eliminations. The information for OncoCyte shown for the period from February 17, 2017 through March 31, 2017 is not included in BioTime’s consolidated statements of operations for the three months ended March 31, 2017, due to the OncoCyte Deconsolidation on February 17, 2017.
(2)
The condensed unaudited balance sheet information of OncoCyte in the table above, as of March 31, 2017, was not included in BioTime’s condensed consolidated balance sheet as of that date. OncoCyte’s balance sheet information as of December 31, 2016 was included in BioTime’s consolidated balance sheet at that date, after intercompany eliminations.
5.
|
Equity Method Accounting for Common Stock of Asterias, at fair value
|
BioTime elected to account for its
21.7 million shares of Asterias common stock
at fair value using the equity method of accounting beginning on May 13, 2016, the date of the Asterias Deconsolidation. The Asterias shares had a fair value of $73.9 million as of March 31, 2017 and a fair value of $100.0 million as of December 31, 2016, based on the closing price of Asterias common stock on the NYSE MKT of $3.40 per share and $4.60 per share on those respective dates. For the three months ended March 31, 2017, BioTime recorded an unrealized loss of $26.1 million on the Asterias shares due to the decrease in Asterias stock price from December 31, 2016 to March 31, 2017 (see Note 12).
The unaudited condensed results of operations for the three months ended March 31, 2017 and 2016, the unaudited condensed balance sheet information of Asterias at March 31, 2017 and the audited balance sheet information of Asterias at December 31, 2016 are summarized below (in thousands):
|
|
Three Months Ended March 31,
(unaudited)
|
|
|
2017
|
|
2016
|
Condensed Statements of Operations
(1)
:
|
|
|
|
|
|
|
Total revenue
|
|
$
|
2,010
|
|
|
$
|
1,594
|
|
Gross profit
|
|
|
1,957
|
|
|
|
1,541
|
|
Loss from operations
|
|
|
(9,107
|
)
|
|
|
(11,016
|
)
|
Net loss
|
|
$
|
(6,287
|
)
|
|
$
|
(10,262
|
)
|
|
|
March 31, 2017
(unaudited)
|
|
December 31, 2016
|
Condensed Balance Sheet information
(2)
:
|
|
|
|
|
|
|
Current assets
|
|
$
|
34,164
|
|
|
$
|
36,990
|
|
Noncurrent assets
|
|
|
23,057
|
|
|
|
24,020
|
|
|
|
$
|
57,221
|
|
|
$
|
61,010
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
2,883
|
|
|
$
|
6,051
|
|
Noncurrent liabilities
|
|
|
9,876
|
|
|
|
12,930
|
|
Stockholders’ equity
|
|
|
44,462
|
|
|
|
42,029
|
|
|
|
$
|
57,221
|
|
|
$
|
61,010
|
|
(1)
The condensed unaudited statement of operations information included in the table above reflects Asterias’ results of operations for the three months ended March 31, 2017 and 2016. Although the periods shown are provided for comparative purposes only, the condensed results of operations of Asterias shown for the three months ended March 31, 2017 was not included in BioTime’s consolidated statements of operations. For the three months ended March 31, 2016, Asterias information was included in BioTime condensed consolidated statements of operations, after intercompany eliminations.
(2)
The condensed unaudited balance sheet information of Asterias in the table above was not included in BioTime’s condensed consolidated balance sheet as of March 31, 2017 and December 31, 2016.
6.
|
Property, plant and equipment, net
|
At March 31, 2017 and December 31, 2016, property, plant and equipment was comprised of the following (in thousands):
|
|
March 31, 2017
(unaudited)
(1)
|
|
December 31,
2016
|
Equipment, furniture and fixtures
|
|
$
|
3,802
|
|
|
$
|
4,718
|
|
Leasehold improvements
|
|
|
4,025
|
|
|
|
3,791
|
|
Accumulated depreciation and amortization
|
|
|
(2,835
|
)
|
|
|
(2,980
|
)
|
Property, plant and equipment, net
|
|
$
|
4,992
|
|
|
$
|
5,529
|
|
(1)
Reflects the effect of the OncoCyte Deconsolidation.
Depreciation expense, including amortization of leasehold improvements, amounted to $216,000 and $429,000 for the three months ended March 31, 2017 and 2016, respectively.
7.
|
Intangible assets, net
|
At March 31, 2017 and December 31, 2016, intangible assets,
primarily consisting of acquired patents, and accumulated amortization were as follows (in thousands):
|
|
March 31, 2017
(unaudited)
(1)
|
|
December 31,
2016
|
Intangible assets
|
|
$
|
23,294
|
|
|
$
|
25,703
|
|
Accumulated amortization
|
|
|
(14,648
|
)
|
|
|
(15,497
|
)
|
Intangible assets, net
|
|
$
|
8,646
|
|
|
$
|
10,206
|
|
(1)
Reflects the effect of the OncoCyte Deconsolidation.
BioTime recognized $602,000 and $1.3 million in amortization expense of intangible assets, included in research and development expenses, during the three months ended March 31, 2017 and 2016, respectively.
8.
|
Accounts Payable and Accrued Liabilities
|
At March 31, 2017 and December 31, 2016, accounts payable and accrued liabilities consisted of the following (in thousands):
|
|
March 31, 2017
(unaudited)
(1)
|
|
December 31,
2016
|
Accounts payable
|
|
$
|
1,064
|
|
|
$
|
1,593
|
|
Accrued expenses
|
|
|
3,738
|
|
|
|
3,212
|
|
Accrued compensation
|
|
|
1,698
|
|
|
|
1,904
|
|
Other current liabilities
|
|
|
447
|
|
|
|
435
|
|
Total
|
|
$
|
6,947
|
|
|
$
|
7,144
|
|
(1)
Reflects the effect of the OncoCyte Deconsolidation.
9.
|
Related Party Transactions
|
Related Party Convertible Debt
Cell Cure issued certain convertible promissory notes (the “Convertible Notes”) to Cell Cure shareholders other than BioTime.
At March 31, 2017, the carrying value of the Convertible Notes was $2,147,000, comprised of principal and accrued interest of $2,700,000, net of unamortized debt discount of $553,000. As of December 31, 2016, the carrying value of the Convertible Notes was $1,865,000, comprised of principal and accrued interest of $2,544,000, net of unamortized debt discount of $679,000.
The functional currency of Cell Cure is the Israeli New Shekel however the Convertible Notes are payable in United States dollars. Consequently, at each balance sheet date, Cell Cure remeasures the Convertible Notes issued to BioTime and other Cell Cure shareholders using the current exchange rate at that date pursuant to ASC 830,
Foreign Currency Matters.
These foreign currency remeasurement gains and losses are included in other income and expense, net. The Convertible Notes bears a stated interest rate of 3% per annum. The total outstanding principal balance of the Convertible Notes, with accrued interest, is due and payable on various maturity dates in July and September 2017, and in February through August 2019. The outstanding principal balance of the Convertible Notes with accrued interest is convertible into Cell Cure ordinary shares at a fixed conversion price of $20.00 per share, at the election of the holder, at any time prior to maturity. Any conversion of the Convertible Notes must be settled with Cell Cure ordinary shares and not with cash. The conversion feature of the Convertible Notes issued is not accounted for as an embedded derivative under the provisions of ASC 815,
Derivatives and Hedging
since it is not a freestanding financial instrument and the underlying Cell Cure ordinary shares are not readily convertible into cash. Accordingly, the Convertible Notes are accounted for under ASC 470-20,
Debt with Conversion and Other Options
(ASC 470-20)
.
Under ASC 470-20, BioTime determined that a beneficial conversion feature (“BCF”) was present on the issuance dates of the Convertible Notes. A conversion feature is beneficial if, on the issuance dates, the effective conversion price is less than the fair value of the issuer’s capital stock. Since the effective conversion price of $20.00 per share is less than the estimated range of fair values from $28.00 per share to $40.00 per share of Cell Cure ordinary shares on the dates the Convertible Notes were issued, a beneficial conversion feature, equal to the intrinsic value ranging from $8 per share to $20 per share, is present. In accordance with ASC 470-20-30-8, if the intrinsic value of the BCF is greater than the proceeds allocated to the convertible instrument, the amount of the discount assigned to the BCF is limited to the amount of the proceeds allocated to the convertible instrument. The BCF is recorded as an addition to equity with a corresponding debt discount on the Convertible Notes’ issuance date. This debt discount is amortized to interest expense using the effective interest method over the three-year term of the debt, representing an approximate effective annual interest rate between 11% and 23%.
As of March 31, 2017, certain tranches of the Convertible Notes in the amount of $614,000, including principal and accrued interest, had matured and are due and payable to Cell Cure shareholders other than BioTime. Cell Cure is currently negotiating the terms of renewal of the Convertible Notes with the holders.
Shared Facilities and Service Agreements with Affiliates
The receivables from affiliates shown on the condensed consolidated balance sheet as of March 31, 2017 primarily represents amounts owed to BioTime from OncoCyte and other affiliates under the Shared Facilities and Service Agreement as follows:
On October 8, 2009, OncoCyte and BioTime entered into a Shared Facilities and Services Agreement (“Shared Facilities Agreement”). Under the terms of the Shared Facilities Agreement, BioTime allows OncoCyte to use BioTime’s premises and equipment located at Alameda, California for the sole purpose of conducting business. BioTime also provides accounting, billing, bookkeeping, payroll, treasury, payment of accounts payable, and other similar administrative services to OncoCyte. BioTime may also provide the services of attorneys, accountants, and other professionals who may also provide professional services to BioTime and its other subsidiaries. BioTime also has provided OncoCyte with the services of laboratory and research personnel, including BioTime employees and contractors, for the performance of research and development work for OncoCyte at the premises.
BioTime charges OncoCyte a “Use Fee” for services provided and usage of BioTime facilities, equipment, and supplies. For each billing period, BioTime prorates and allocates to OncoCyte costs incurred, including costs for services of Bio Time employees and use of equipment, insurance, leased space, professional services, software licenses, supplies and utilities. The allocation of costs depends on key cost drivers, including actual documented use, square footage of facilities used, time spent, costs incurred by BioTime for OncoCyte, or upon proportionate usage by BioTime and OncoCyte, as reasonably estimated by BioTime. BioTime, at its discretion, has the right to charge OncoCyte a 5% markup on such allocated costs although BioTime elected not to charge this markup from the inception of the Shared Facilities Agreement through December 31, 2015. For allocated costs incurred beginning on January 1, 2016, BioTime is charging the 5% markup. The allocated cost of BioTime employees and contractors who provide services is based upon records maintained of the number of hours of such personnel devoted to the performance of services.
The Use Fee is determined and invoiced to OncoCyte on a quarterly basis for each calendar quarter of each calendar year. If the Shared Facilities Agreement terminates prior to the last day of a billing period, the Use Fee will be determined for the number of days in the billing period elapsed prior to the termination of the Shared Facilities Agreement. Each invoice will be payable in full by OncoCyte within 30 days after receipt. Any invoice, or portion thereof, not paid in full when due will bear interest at the rate of 15% per annum until paid, unless the failure to make a payment is due to any inaction or delay in making a payment by BioTime employees from OncoCyte funds available for such purpose, rather than from the unavailability of sufficient funds legally available for payment or from an act, omission, or delay by any employee or agent of OncoCyte. Through March 31, 2017, BioTime has not charged OncoCyte any interest.
In addition to the Use Fees, OncoCyte will reimburse BioTime for any out of pocket costs incurred by BioTime for the purchase of office supplies, laboratory supplies, and other goods and materials and services for the account or use of OncoCyte, provided that invoices documenting such costs are delivered to OncoCyte with each invoice for the Use Fee. BioTime will have no obligation to purchase or acquire any office supplies or other goods and materials or any services for OncoCyte, and if any such supplies, goods, materials or services are obtained for OncoCyte, BioTime may arrange for the suppliers to invoice OncoCyte directly.
The Shared Facilities Agreement will remain in effect, unless either party gives the other party written notice stating that the Shared Facilities Agreement will terminate on December 31 of that year, or unless the agreement is otherwise terminated under another provision of the agreement.
As of March 31, 2017, BioTime has a $2.6 million receivable from OncoCyte included in receivable from affiliates, net, on account of Use Fees incurred by OncoCyte under the Shared Facilities Agreement. Since these amounts are due and payable within 30 days of being invoiced, the receivable is classified as a current asset. The remaining $0.2 million receivable from affiliate is due from Ascendance Biotechnology, Inc. (“Ascendance”), an equity method investee of BioTime, net of allowance for doubtful accounts, for similar shared services performed by BioTime for Ascendance. BioTime has a similar Shared Facilities Agreement with Asterias and as of March 31, 2017, there was no net receivable from Asterias. As of December 31, 2016, BioTime had a receivable from Asterias of approximately $0.3 million which was paid during the three months ended March 31, 2017.
BioTime accounts for receivables from affiliates, net of payables to affiliates, if any, for similar shared services and other transactions BioTime’s consolidated subsidiaries may enter into with nonconsolidated affiliates. BioTime and the affiliates record those receivables and payables on a net basis since BioTime and the affiliate have a legal right of offset of the receivable and the payable, intend to offset those receivables and payables, and settle the balances net by having the party that owes the other party pay the net balance owed.
Other related party transaction
BioTime currently pays $5,050 per month for the use of approximately 900 square feet of office space in New York City, which is made available to BioTime on a month-by-month basis by one of its directors at an amount that approximates his cost.
Preferred Shares
BioTime is authorized to issue 2,000,000 preferred shares. The preferred shares may be issued in one or more series as the board of directors may by resolution determine. The board of directors is authorized to fix the number of shares of any series of preferred shares and to determine or alter the rights, preferences, privileges, and restrictions granted to or imposed on the preferred shares as a class, or upon any wholly unissued series of any preferred shares. The board of directors may, by resolution, increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any series of preferred shares subsequent to the issue of shares of that series. There are no preferred shares issued and outstanding.
BioTime is authorized to issue 150,000,000 common shares with no par value. As of December 31, 2016, BioTime had
103,396,245
issued and
102,776,539
outstanding common shares. This difference of
619,706
shares between issued and outstanding common shares, as of December 31, 2016, was attributed to the BioTime shares held by OncoCyte which were accounted for as treasury stock on the condensed consolidated balance sheet while OncoCyte was a consolidated subsidiary. Beginning o
n February 17, 2017, and in connection with the OncoCyte Deconsolidation, those treasury shares are considered to be issued and outstanding BioTime common shares.
As of March 31, 2017, BioTime had 110,860,004 issued and outstanding common shares and
no outstanding treasury stock.
During February 2017, BioTime sold 7,453,704 common shares in an underwritten public offering. The offering price to the public was $2.70 per share and net proceeds to BioTime were approximately $18.8 million, after deducting underwriting discounts, commissions and expenses related to the financing.
BioTime has adopted a 2012 Equity Incentive Plan (the “2012 Plan”) under which BioTime has reserved 10,000,000 common shares for the grant of stock options, restricted stock, restricted stock units and stock appreciation rights.
A summary of BioTime’s 2012 Plan activity and related information follows (in thousands, except per share amounts):
|
|
Shares
Available
for Grant
|
|
Number of
Options
Outstanding
|
|
Number
of RSUs
Outstanding
|
|
Weighted
Average
Exercise
Price of
Options
|
December 31, 2016
|
|
|
2,894
|
|
|
|
6,958
|
|
|
|
100
|
|
|
$
|
3.60
|
|
Options granted
|
|
|
(583
|
)
|
|
|
583
|
|
|
|
-
|
|
|
|
3.06
|
|
Options exercised
|
|
|
-
|
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
2.66
|
|
Options forfeited/cancelled
|
|
|
281
|
|
|
|
(336
|
)
|
|
|
-
|
|
|
|
3.90
|
|
March 31, 2017
|
|
|
2,592
|
|
|
|
7,196
|
|
|
|
100
|
|
|
$
|
3.55
|
|
Stock-Based Compensation Expense
The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model applying the weighted-average assumptions noted in the following table
:
|
|
Three Months Ended March 31,
(unaudited)
|
|
|
2017
|
|
2016
|
Expected life (in years)
|
|
|
6.08
|
|
|
|
6.08
|
|
Risk-free interest rates
|
|
|
2.07
|
%
|
|
|
1.60
|
%
|
Volatility
|
|
|
59.83
|
%
|
|
|
62.05
|
%
|
Dividend yield
|
|
|
-
|
%
|
|
|
-
|
%
|
Operating expenses include stock-based compensation expense as follows (in thousands):
|
|
|
Three Months Ended
March 31,
(unaudited)
|
|
|
|
2017
|
|
|
2016
|
Research and development
|
|
$
|
331
|
|
|
$
|
1,206
|
|
General and administrative
|
|
|
695
|
|
|
|
2,167
|
|
Total stock-based compensation expense
|
|
$
|
1,026
|
|
|
$
|
3,373
|
|
The provision for income taxes for interim periods is determined using an estimated annual effective tax rate as prescribed by ASC 740-270,
Income Taxes, Interim Reporting
. The effective tax rate may be subject to fluctuations during the year as new information is obtained, which may affect the assumptions used to estimate the annual effective tax rate, including factors such as valuation allowances and changes in valuation allowances against deferred tax assets, the recognition or de-recognition of tax benefits related to uncertain tax positions, if any, and changes in or the interpretation of tax laws in jurisdictions where BioTime conducts business. ASC 740-270 also states that if an entity is unable to reliably estimate a part of its ordinary income or loss, the income tax provision or benefit applicable to the item that cannot be estimated shall be reported in the interim period in which the item is reported.
For items that BioTime cannot reliably estimate on an annual basis (principally unrealized gains or losses generated on its Asterias and OncoCyte shares due to the changes in the respective stock prices of Asterias and OncoCyte), BioTime uses the actual year to date effective tax rate rather than an estimated annual effective tax rate to determine the tax effect of that item, including the use of all available net operating losses and other credits or deferred tax assets.
In connection with the deconsolidation of Asterias and OncoCyte (see Note 3), although neither deconsolidation was a taxable transaction to BioTime and did not create a current income tax payment obligation to BioTime, the market value of the respective shares BioTime holds creates a deferred tax liability to BioTime based on the closing price of the security, less the tax basis of the security BioTime has in such shares. The deferred tax liability generated by the Asterias and OncoCyte shares that BioTime holds as of March 31, 2017, is a
source of future taxable income to BioTime, as prescribed by ASC 740-10-30-17, that will more likely than not result in the realization of its deferred tax assets to the extent of those deferred tax liabilities.
This deferred tax liability is determined based on the closing price of those securities as of March 31, 2017. Due to the inherent unpredictability of future prices of these securities, BioTime cannot reliably estimate or project those deferred tax liabilities on an annual basis. Therefore, the deferred tax liability pertaining to Asterias and OncoCyte shares, determined based on the actual closing price on the interim period end date being reported on, and the related impacts to the valuation allowance and deferred tax asset changes, are recorded in the interim period in which they occur.
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized.
For federal income tax purposes, as a result of the deconsolidation of Asterias and OncoCyte as discussed in Note 3 and the deferred tax liabilities generated from the Asterias and OncoCyte share market values from their respective deconsolidation dates, including the changes to those deferred tax liabilities due to changes in the Asterias and OncoCyte stock price through March 31, 2017, BioTime's deferred tax liabilities exceeded its deferred tax assets by $3.9 million as of March 31, 2017. Accordingly, as of March 31, 2017, for federal income tax purposes, BioTime released its entire valuation allowance and recognized a federal deferred income tax expense of $3.9 million during the three months ended March 31, 2017. For state income tax purposes, BioTime has a full valuation allowance on its state deferred tax assets as of March 31, 2017 and December 31, 2016 and, accordingly, no state tax provision or benefit was recorded for any period presented.
BioTime established a full valuation allowance as of December 31, 2016 and 2015 due to the uncertainty of realizing future tax benefits from its net operating loss carryforwards and other deferred tax assets. Accordingly, BioTime did not record any provision or benefit for income taxes for the three months ended March 31, 2016.
On February 16, 2016, BioTime and Asterias completed certain transactions under a
Cross-License Agreement and Share Transfer Agreement
pursuant to which BioTime
transferred certain assets to Asterias. The asset transfer was a taxable transaction to BioTime generating a taxable gain of approximately $3.1 million
. BioTime had sufficient current year losses from operations to offset the entire gain resulting in no income taxes due. As the transfer of assets and the resulting taxable gain was due to a
direct effect of transactions between the then parent company, BioTime, and its then subsidiary, Asterias
, BioTime recorded the tax effects of this gain through equity in accordance with ASC 740-20-45-11(g) during the three months ended March 31, 2016.
13.
|
Commitments and Contingencies
|
Alameda Lease
On December 10, 2015, BioTime entered into a lease for approximately 30,795 square feet of rentable space in two buildings located in an office park in Alameda, California (the “New Alameda Lease”). The term of the New Alameda Lease is seven years and BioTime has an option to renew the term for an additional five years. BioTime moved into the facility and the term of the New Alameda Lease commenced effective February 1, 2016.
Base rent under the New Alameda Lease commenced on February 1, 2016 at $64,670 per month, and will increase by approximately 3% annually on every February 1 thereafter during the lease term. The lease payments allocated to the landlord liability are amortized as debt service on that liability over the lease term.
Litigation – General
BioTime will be subject to various claims and contingencies in the ordinary course of its business, including those related to litigation, business transactions, employee-related matters, and others. When BioTime is aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, BioTime will record a liability for the loss. If the loss is not probable or the amount of the loss cannot be reasonably estimated, BioTime discloses the claim if the likelihood of a potential loss is reasonably possible and the amount involved could be material. BioTime is not aware of any claims likely to have a material adverse effect on its financial condition or results of operations.
Employment Contracts
BioTime has entered into employment agreements with certain executive officers. Under the provisions of the agreements, BioTime may be required to incur severance obligations for matters relating to changes in control, as defined in the agreements, and involuntary terminations.
Indemnification
In the normal course of business, BioTime may provide indemnifications of varying scope under BioTime’s agreements with other companies or consultants, typically BioTime’s clinical research organizations, investigators, clinical sites, suppliers and others. Pursuant to these agreements, BioTime will generally agree to indemnify, hold harmless, and reimburse the indemnified parties for losses and expenses suffered or incurred by the indemnified parties arising from claims of third parties in connection with the use or testing of BioTime’s products and services. Indemnification provisions could also cover third party infringement claims with respect to patent rights, copyrights, or other intellectual property pertaining to BioTime products and services. The term of these indemnification agreements will generally continue in effect after the termination or expiration of the particular research, development, services, or license agreement to which they relate. The potential future payments BioTime could be required to make under these indemnification agreements will generally not be subject to any specified maximum amount. Historically, BioTime has not been subject to any claims or demands for indemnification. BioTime also maintains various liability insurance policies that limit BioTime’s financial exposure. As a result, BioTime believes the fair value of these indemnification agreements is minimal. Accordingly, BioTime has not recorded any liabilities for these agreements as of March 31, 2017 and December 31, 2016.
On April 6, 2017, BioTime, entered into a Controlled Equity Offering
SM
Sales Agreement (the “Sales Agreement”) with Cantor Fitzgerald & Co., as sales agent (“Cantor Fitzgerald”), pursuant to which BioTime may offer and sell, from time to time, through Cantor Fitzgerald, shares of BioTime common stock, no par value per share, having an aggregate offering price of up to $25,000,000.
BioTime is not obligated to sell any shares under the Sales Agreement. Subject to the terms and conditions of the Sales Agreement, Cantor Fitzgerald will use commercially reasonable efforts, consistent with its normal trading and sales practices, applicable state and federal law, rules and regulations, and the rules of the NYSE MKT, to sell the shares from time to time based upon BioTime’s instructions, including any price, time or size limits specified by BioTime. Under the Sales Agreement, Cantor Fitzgerald may sell the shares by any method deemed to be an “at-the-market” offering as defined in Rule 415(a)(4) under the Securities Act of 1933, as amended, or by any other method permitted by law, including in privately negotiated transactions. Cantor Fitzgerald’s obligations to sell the shares under the Sales Agreement are subject to satisfaction of certain conditions, including the effectiveness of BioTime’s Registration Statement on Form S-3 (File No. 333-217182) (the “Registration Statement”), filed with the Securities and Exchange Commission (the “SEC”) on April 6, 2017, and Amendment No. 1 to the Registration Statement, filed with the SEC on May 2, 2017, which the SEC declared effective on May 5, 2017.
BioTime will pay Cantor Fitzgerald a commission of 3.0% of the aggregate gross proceeds from each sale of shares, reimburse legal fees and disbursements and provide Cantor Fitzgerald with customary indemnification and contribution rights. The Sales Agreement may be terminated by Cantor Fitzgerald or BioTime at any time upon notice to the other party, or by Cantor Fitzgerald at any time in certain circumstances, including the occurrence of a material and adverse change in BioTime’s business or financial condition that makes it impractical or inadvisable to market the shares or to enforce contracts for the sale of the shares.