NOTES
TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
1.
Organization and Business Overview
General
–
BioTime, Inc. (“BioTime” or the “Company”) is a clinical-stage biotechnology company targeting
degenerative diseases. BioTime’s programs are based on two proprietary core technology platforms: cell replacement and cell/drug
delivery. With the cell replacement platform, BioTime is producing new cells and tissues with its pluripotent and progenitor cell
technologies. These cells and tissues are developed to replace those that are either rendered dysfunctional or lost due to degenerative
diseases or injuries. BioTime’s cell/drug delivery programs are based upon its proprietary
HyStem
®
cell and drug delivery matrix technology.
HyStem
®
was designed to provide for the transfer, retention, and/or
engraftment of cell replacement therapies and to act as a device for localized drug delivery.
BioTime’s
lead cell replacement clinical product is
OpRegen
®
, a retinal pigmented epithelium (RPE) cell replacement
therapy, which is in a Phase I/IIa multicenter trial for the treatment of late-stage, dry age-related macular degeneration (dry-AMD).
There are currently no FDA-approved therapies for dry-AMD, which accounts for approximately 90% of all age-related macular degeneration
cases, and is the leading cause of blindness in people over the age of 60.
BioTime’s
lead cell delivery clinical product, based on its proprietary
HyStem
®
technology, is
Renevia
®
,
a potential treatment for facial lipoatrophy. “Lipoatrophy” means the loss of fat tissue, which can be caused by several
factors, including trauma, aging, or drug side effects, such as those that cause HIV-associated lipoatrophy. BioTime is also developing
HyStem
®
for the sustained delivery of therapeutic drugs and targeted cells to specific areas of the body.
In
2017, BioTime formed AgeX Therapeutics, Inc. (“AgeX”)
to
continue development of early-stage programs focusing on
development of regenerative medicine
technologies targeting the diseases of aging and metabolic disorders.
AgeX’s initial programs focus on utilizing
brown adipose tissue (“brown fat”) in targeting diabetes, obesity, and heart disease; and induced tissue regeneration
(“iTR”) in utilizing the human body’s own abilities to scarlessly regenerate tissues damaged from age or trauma
.
AgeX may also pursue other early-stage programs.
On
August 17, 2017, AgeX completed an asset acquisition and stock sale pursuant to which it received certain assets from BioTime
for use in its research and development programs and raised $10.0 million in cash from investors to finance its operations. This
capitalization of AgeX
has allowed BioTime to
focus its resources on its clinical programs in its core therapeutic sectors.
As of March
31, 2018, BioTime owned approximately 85% of the issued and outstanding shares of AgeX common stock (see Note 10).
BioTime
is also enabling early-stage programs in other new technologies through its own research programs as well as through other subsidiaries
or affiliates.
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 American: AST) is presently focused on advancing three clinical-stage programs that have the potential
to address areas of very high unmet medical needs in the fields of neurology (spinal cord injury) and oncology (Acute Myeloid
Leukemia and lung cancer). OncoCyte (NYSE American: OCX) is developing confirmatory diagnostic tests for lung cancer, breast cancer,
and bladder cancer utilizing novel liquid biopsy technology.
Beginning
on February 17, 2017, BioTime deconsolidated OncoCyte’s financial statements and results of operations from BioTime
(the “OncoCyte Deconsolidation”) (see Notes 3 and 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 interim financial statements presented herein, and discussed below, have been prepared in accordance
with generally accepted accounting principles in the U.S. (“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. The condensed consolidated balance sheet as of December 31, 2017 was derived from the audited
consolidated financial statements at that date, but does not include all the information and footnotes required by GAAP. These
condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements
and notes thereto included in BioTime’s Annual Report on Form 10-K for the year ended December 31, 2017.
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 condensed 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 Cell Cure Neurosciences, Ltd (“Cell Cure”),
OrthoCyte Corporation (“OrthoCyte”), ES Cell International, Pte Ltd (“ESI”), BioTime Asia, Limited (“BioTime
Asia”), AgeX Therapeutics, Inc. (“AgeX”), ReCyte Therapeutics, Inc. (“ReCyte”), LifeMap Sciences,
Inc. (“LifeMap Sciences”) and LifeMap Sciences, Ltd., as BioTime has the ability to control their operating and financial
decisions and policies through its stock ownership or representation on the board of directors, and the noncontrolling interest
is reflected as a separate element of shareholders’ equity on BioTime’s condensed consolidated balance sheets.
Beginning
on February 17, 2017 and May 13, 2016, respectively, OncoCyte and Asterias financial statements and results are no longer a part
of BioTime’s condensed consolidated financial statements and results. The market value of OncoCyte and Asterias common stock,
as of those respective dates, held by BioTime is now reflected on BioTime’s condensed consolidated balance sheet
and
the subsequent changes
in the market value of those shares is reflected in BioTime’s condensed
consolidated
balance sheet and condensed
consolidated statements of operations, allowing BioTime shareholders to evaluate the value
of the respective OncoCyte and Asterias’ portion of BioTime’s business.
OncoCyte’s
results are not included in BioTime’s condensed consolidated statements of operations for the three months ended March 31,
2018.
BioTime’s condensed consolidated
statements of operations for the three months ended March 31, 2017 include OncoCyte’s results for the period from January
1, 2017 through February 16, 2017, the day immediately preceding the OncoCyte Deconsolidation.
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, 2018, BioTime had an accumulated deficit of $279.4 million, working capital of $30.3 million and shareholders’
equity of $102.5 million. BioTime has evaluated its projected cash flows and believes that its cash, cash equivalents and marketable
equity securities of $31.4 million at March 31, 2018 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 condensed
consolidated financial statements included in this Report. BioTime also holds shares of Asterias and OncoCyte common stock with
a combined market value of $62.3 million at March 31, 2018. 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, and the unavailability or inadequacy of financing to meet
future capital needs could force it 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 its 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. For example, clinical trials being conducted for its
OpRegen
®
program will be funded in part with funds from grants and not from cash on hand. If BioTime were to lose grant funding
or is unable to continue to provide working capital to the
OpRegen
®
program, it may be required to delay,
postpone, or cancel the clinical trials or limit the number of clinical trial sites, unless BioTime is able to obtain adequate
financing from another source that could be used for the clinical trials. 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 condensed consolidated statements of operations in other income and
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 at each balance sheet date using the closing prices of Asterias and OncoCyte common
stock on the NYSE American 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 and 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
.
Marketable
equity securities in foreign investments
– BioTime accounts for the shares it holds in foreign equity securities as
marketable equity in accordance with ASC 320-10-25,
Investments – Debt and Equity Securities
, as amended by Accounting
Standards Update (“ASU”) 2016-01,
Financial Instruments–Overall: Recognition and Measurement of Financial
Assets and Financial Liabilities
,
further discussed below, as the shares have
a readily determinable fair value quoted on the Tel Aviv Stock Exchange (“TASE”) (under trading symbol “HDST”)
where share prices are denominated in New Israeli Shekels (NIS). These securities are held principally to meet future working
capital needs. The securities are measured at fair value and reported as current assets on the consolidated balance sheets based
on the closing trading price of the security as of the date being presented. Beginning on January 1, 2018, with the adoption of
ASU 2016-01 discussed below, these securities are now called “marketable equity securities” and unrealized holding
gains and losses on these securities, including changes in foreign currency exchange rates, are reported in the consolidated statements
of operations in other income and expenses, net. Prior to January 1, 2018 and the adoption of ASU 2016-01, these securities were
called “available-for-sale securities” and unrealized holding gains and losses, including changes in foreign currency
exchange rates, were reported in other comprehensive income or loss, net of tax, and were a component of the accumulated other
comprehensive income or loss on the consolidated balance sheet. Realized gains and losses, and declines in value judged to be
other-than-temporary related to marketable equity securities, are included in other income and expenses, net, in the consolidated
statements of operations.
On
January 1, 2018, in accordance with the adoption of ASU 2016-01, BioTime recorded a cumulative-effect adjustment for these available-for-sale-securities
to reclassify the unrealized gain of $328,000 included in consolidated accumulated other comprehensive income to the beginning
of the year consolidated accumulated deficit account. For the three months ended March 31, 2018, BioTime recorded an unrealized
gain of $215,000 included in other income and expenses, net, due to the increase in fair market value of the marketable equity
securities from December 31, 2017 to March 31, 2018.
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, if any.
For
the three months ended March 31, 2018, there were no potentially dilutive common share equivalents due to the net loss reported
for this period presented. 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, and approximately 342,000 restricted stock units and outstanding stock options (see Note 11).
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)
|
|
|
|
2018
|
|
|
2017
|
|
Stock options
|
|
|
9,243
|
|
|
|
4,701
|
|
Warrants
|
|
|
9,395
|
|
|
|
9,395
|
|
Restricted stock units
|
|
|
56
|
|
|
|
100
|
|
Recently
Adopted Accounting Pronouncements
Adoption
of ASU 2016-18
,
Statement of Cash Flows (Topic 230).
On January
1, 2018, BioTime adopted Financial Accounting Standards Board (“FASB”) ASU 2016-18,
Statement of Cash Flows (Topic
230): Restricted Cash
, which requires that the statement of cash flows explain the change during the period in the total of
cash, cash equivalents and restricted cash, and that restricted cash be included with cash and cash equivalents when reconciling
the beginning-of-period and end-of-period total amounts shown on the consolidated statements of cash flows. The adoption of ASU
2016-18 did not have a material effect on BioTime’s consolidated financial statements. However, prior period restricted
cash balances included in prepaid expenses and other current assets, and in deposits and other long-term assets, on the consolidated
balance sheets was added to the beginning-of-period and end-of-period total consolidated cash and cash equivalents in the consolidated
statements of cash flows to conform to the current presentation shown below.
The
following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance
sheet dates that comprise the total of the same such amounts shown in the consolidated statements of cash flows for all periods
presented herein and effected by the adoption of ASU 2016-18 (in thousands):
|
|
March 31, 2018 (unaudited)
|
|
|
December 31,
2017
|
|
|
March 31, 2017 (unaudited)
|
|
|
December 31,
2016
|
|
Cash and cash equivalents
|
|
$
|
29,827
|
|
|
$
|
36,838
|
|
|
$
|
23,816
|
|
|
$
|
22,088
|
|
Restricted cash included in prepaid expenses and other current assets (see Note 13)
|
|
|
346
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Restricted cash included in deposits and other long-term assets (see Note 13)
|
|
|
78
|
|
|
|
847
|
|
|
|
847
|
|
|
|
847
|
|
Total cash, cash equivalents, and restricted cash as shown in the consolidated statements of cash flows
|
|
$
|
30,251
|
|
|
$
|
37,685
|
|
|
$
|
24,663
|
|
|
$
|
22,935
|
|
Adoption
of ASU 2014-09
, Revenues from Contracts with Customers (Topic 606).
During
May 2014, the FASB issued ASU 2014-09 (“Topic
606”)
Revenue from Contracts with Customers
which supersedes the revenue recognition requirements in Topic 605
Revenue
Recognition
(“Topic 605”). Topic 606 describes principles an entity must apply to measure and recognize revenue
and the related cash flows, using the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance
obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s)
in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. Topic 606 core principle
is that it requires entities to recognize revenue when control of the promised goods or services is transferred to customers at
an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services.
BioTime
adopted Topic 606 as of January 1, 2018 using the modified retrospective transition method applied to those contracts which were
not completed as of the adoption date. Results for reporting periods beginning on January 1, 2018 and thereafter are presented
under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with BioTime’s historic
revenue recognition accounting under Topic 605.
On
January 1, 2018, the adoption and application of Topic 606 resulted in an immaterial cumulative effect adjustment of BioTime’s
beginning consolidated accumulated deficit balance. In the applicable paragraphs below, BioTime has summarized its revenue recognition
policies for its various revenue sources in accordance with Topic 606.
Revenue
Recognition by Source and Geography
. Revenues are recognized when control of the promised goods or services is transferred
to customers, or in the case of governmental entities funding a grant, when allowable expenses are incurred, in an amount that
reflects the consideration BioTime or a subsidiary, depending on which company has the customer or the grant, expects to be entitled
to in exchange for those goods or services. See further discussion under
Grant Revenues
below.
The
following table presents BioTime’s consolidated revenues disaggregated by source (in thousands).
|
|
Three Months Ended March 31,
(unaudited)
|
|
|
|
2018
|
|
|
2017
(1)
|
|
Grant revenue
|
|
$
|
326
|
|
|
$
|
11
|
|
Royalties from product sales and license fees
|
|
|
136
|
|
|
|
110
|
|
Subscription and advertisement revenues
|
|
|
239
|
|
|
|
264
|
|
Sale of research products and services
|
|
|
-
|
|
|
|
5
|
|
Total revenues
|
|
$
|
701
|
|
|
$
|
390
|
|
|
(1)
|
Amounts
recognized prior to adoption of Topic 606 have not been adjusted under the Topic 606 modified retrospective transition method.
|
The
following table presents consolidated revenues (in thousands), disaggregated by geography, based on the billing addresses of customers,
or in the case of grant revenues based on where the governmental entities that fund the grant are located. See further discussion
under
Grant Revenues
below.
|
|
Three Months Ended March 31,
(unaudited)
|
|
|
|
2018
|
|
|
2017
(1)
|
|
United States
|
|
$
|
507
|
|
|
$
|
173
|
|
Foreign
|
|
|
194
|
|
|
|
217
|
|
Total revenues
|
|
$
|
701
|
|
|
$
|
390
|
|
Research
and development contracts with customers.
In its agreements with customers, BioTime’s performance obligations of research
and development are completed as services are performed and control passes to the customer, and accordingly revenues are recognized
over time. BioTime generally receives a fee at the inception of an agreement, with variable fees, if any, tied to certain milestones,
if achieved. BioTime estimates this variable consideration using a single most likely amount. Based on historical experience,
there has been no variable consideration related to milestones included in the transaction price due to the significant uncertainty
of achieving contract milestones and milestones not being met. If a milestone is met, subsequent changes in the single most likely
amount may produce a different variable consideration, and BioTime will allocate any subsequent changes in the transaction price
on the same basis as at contract inception. Amounts allocated to a satisfied performance obligation will be recognized as revenue
in the period in which the transaction price changes with respect to variable consideration, which could result in a reduction
of revenue. Contracts of this kind are typically for a term greater than one year. For the three months ended March 31, 2018 and
2017, BioTime recognized $77,000 for each respective quarter for such services included in the consolidated royalties from product
sales and license fees. The aggregate amount of the transaction price, excluding payments related to any milestones, allocated
to performance obligations that are unsatisfied, or partially unsatisfied, as of March 31, 2018 was $231,000, included in deferred
revenues in the consolidated balance sheets. BioTime expects to recognize revenue of $77,000 per quarter through the year ending
December 31, 2018. As of March 31, 2018, BioTime had not met any milestones that would require adjustment of the transaction price.
Royalties
from product sales and license fees.
BioTime’s performance obligations in agreements with certain customers is to provide
a license to allow customers to make, import and sell company licensed products or methods for pre-clinical studies and commercial
use. Customers pay a combination of a license issue fee paid up front and a sales-based royalty, if any, in some cases with yearly
minimums. The transaction price is deemed to be the license issue fee stated in the contract. The license offered by BioTime is
a functional license with significant standalone functionality and provides customers with the right to use BioTime’s intellectual
property. This allows BioTime to recognize revenue on the license issue fee at a point in time at the beginning of the contract,
which is when the customer begins to have use of the license. Variable consideration related to sales-based royalties is recognized
only when (or as) the later of the following events occurs: (a) a sale or usage occurs, or (b) the performance obligation to which
some, or all, of the sales-based or usage-based royalty has been allocated has been satisfied or partially satisfied. Due to the
contract termination clauses, BioTime does not expect to receive all of the minimum royalty payments throughout the term of the
agreements. Therefore, BioTime fully constrains recognition of the minimum royalty payments as revenues until its customers are
obligated to pay, which is generally within 60 days prior to beginning of each year the minimum royalty payments are due.
For
the three months ended March 31, 2018 and 2017, BioTime recognized $59,000 and $33,000, respectively, in royalty revenues included
in consolidated royalties from product sales and license fees.
Sale
of research products and services.
Revenues from the sale of research products and services are primarily derived from the
sale of hydrogels and stem cell products for research use and are recognized when earned. Revenues from this source are immaterial
for all periods presented.
Subscription
and advertisement revenues
. LifeMap Sciences, a direct majority-owned subsidiary of AgeX, sells subscription-based products
,
including research databases and software tools,
for b
iomedical, gene, disease, and
stem cell research.
LifeMap Sciences sells these subscriptions primarily through the internet to biotech and pharmaceutical
companies worldwide. LifeMap Sciences’ principal subscription product is the
GeneCards
®
Suite, which
includes the
GeneCards
®
human gene database, and the
MalaCards
™ human disease database.
LifeMap
Sciences’ performance obligations for subscriptions include a license of intellectual property related to its genetic information
packages and premium genetic information tools. The licenses for genetic information packages are deemed functional licenses that
provide customers with a “right to access” to LifeMap Sciences’ intellectual property during the subscription
period and, accordingly, revenue is recognized over a period of time, which is generally the subscription period. The license
for the premium genetic information tools is a functional license and provides the customer with a “right to use”
LifeMap Sciences’ intellectual property and, accordingly, revenue is recognized upfront at the beginning of the subscription
period. Payments are typically received at the beginning of a subscription period and revenue is recognized according to
the type of subscription sold. Amounts required to be allocated to the premium genetic information tools for immediate recognition
is immaterial.
For
subscription contracts in which the subscription term commences before a payment is due, LifeMap Sciences records an accounts
receivable as the subscription is earned over time and bills the customer according to the contract terms. LifeMap Sciences continuously
monitors collections and payments from customers and maintains a provision for estimated credit losses and uncollectible accounts
based upon its historical experience and any specific customer collection issues that have been identified. Amounts determined
to be uncollectible are written off against the allowance for doubtful accounts. LifeMap Sciences has not historically provided
significant discounts, credits, concessions, or other incentives from the stated price in the contract as the prices are offered
on a fixed fee basis for the type of subscription package being purchased. LifeMap Sciences may issue refunds only if the packages
cease to be available for reasons beyond its control. In such an event, the customer will get a refund on a pro-rata basis. Using
the most likely amount method for estimating refunds under Topic 606, including historical experience, LifeMap Sciences determined
that the single most likely amount of variable consideration for refunds is immaterial as LifeMap Sciences does not expect to
pay any refunds. Both the customer and LifeMap Sciences expect the subscription packages to be available during the entire subscription
period, and LifeMap Sciences has not experienced any significant issues with the availability of the product and has not issued
any material refunds.
LifeMap
Sciences performance obligations for advertising are overall advertising services and represent a series of distinct services.
Contracts are typically less than a year in duration and the fees charged may include a combination of fixed and variable fees
with the variable fees tied to click throughs to the customer’s products on their website. LifeMap Sciences allocates the
variable consideration to each month the click through services occur and allocates the annual fee to the performance obligation
period of the initial term of the contract because those amounts correspond to the value provided to the customer each month.
For click-through advertising services, at the time the variable compensation is known and determinable, the service has been
rendered. Revenue is recognized at that time. The annual fee is recognized over the initial subscription period because this is
a service and the customer simultaneously receives and consumes the benefit of LifeMap Sciences’ performance.
LifeMap
Sciences deferred subscription revenues primarily represent subscriptions for which cash payment has been received for the subscription
term but the subscription term has not been completed as of the balance sheet date reported. For the three months ended March
31, 2018 and 2017, LifeMap Sciences recognized $239,000 and $264,000 in subscription and advertisement revenues. As of March 31,
2018, there was $330,000 included in deferred revenues in the condensed consolidated balance sheets which is expected to be recognized
as subscription revenue over the next twelve months.
LifeMap
Sciences has licensed from a third party the databases it commercializes and has a contractual obligation to pay royalties
to the licensor on subscriptions sold. These costs are included in cost of sales on the condensed consolidated statements
of operations when the cash is received and the royalty obligation is incurred as the royalty payments do not qualify for capitalization
of costs to fulfill a contract under ASC 340-40,
Other Assets and Deferred Costs – Contracts with Customers
.
Grant
Revenues
. In applying the provisions of Topic 606, BioTime has determined that government grants are out of the scope of Topic
606 because the government entities do not meet the definition of a “customer”, as defined by Topic 606, as there
is not considered to be a transfer of control of good or services to the government entities funding the grant. BioTime has, and
will continue to, account for grants received to perform research and development services in accordance with ASC 730-20,
Research
and Development Arrangements
, which requires an assessment, at the inception of the grant, of whether the grant is a liability
or a contract to perform research and development services for others. If BioTime or a subsidiary receiving the grant is obligated
to repay the grant funds to the grantor regardless of the outcome of the research and development activities, then BioTime is
required to estimate and recognize that liability. Alternatively, if BioTime or a subsidiary receiving the grant is not required
to repay, or if it is required to repay the grant funds only if the research and development activities are successful, then the
grant agreement is accounted for as a contract to perform research and development services for others, in which case, grant revenue
is recognized when the related research and development expenses are incurred (see Note 13).
Deferred
grant revenues represent grant funds received from the governmental funding agencies for which the allowable expenses have not
yet been incurred as of the balance sheet date reported.
Arrangements
with Multiple Performance Obligations
. BioTime’s contracts with customers may include multiple performance obligations.
For such arrangements, BioTime allocates revenue to each performance obligation based on its relative standalone selling price.
BioTime generally determines or estimates standalone selling prices based on the prices charged, or that would be charged, to
customers for that product or service. As of, and for the three months ended, March 31, 2018, BioTime did not have significant
arrangements with multiple performance obligations.
Adoption
of ASU 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities
.
Changes to the current GAAP model under ASU 2016-01 primarily affects the accounting for
equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial
instruments. In addition, ASU 2016-01 clarified guidance related to the valuation allowance assessment when recognizing deferred
tax assets resulting from unrealized losses on available-for-sale debt securities. The accounting for other financial instruments,
such as loans, investments in debt securities, and financial liabilities is largely unchanged. The more significant amendments
are to equity investments in unconsolidated entities. In accordance with ASU No. 2016-01, all equity investments in unconsolidated
entities (other than those accounted for using the equity method of accounting) will generally be measured at fair value through
earnings. There will no longer be an available-for-sale classification (changes in fair value reported in other comprehensive
income) for equity securities with readily determinable fair values.
As
further discussed above under the
m
arketable
equity securities in foreign investments
policy,
BioTime adopted ASU 2016-01 on January 1, 2018.
Recently
Issued Accounting Pronouncements Not Yet Adopted
– The recently issued accounting pronouncements applicable to BioTime
that are not yet effective 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, 2017.
3.
Deconsolidation of OncoCyte
On
February 17, 2017, OncoCyte issued 625,000 shares of OncoCyte common stock to certain investors who exercised OncoCyte stock purchase
warrants. As a result of this exercise and the issuance of the 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.
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 $30.8 million as of March 31, 2018, and a fair value of $
68.2 million
as of December 31, 2017
, based on the closing price of OncoCyte common stock on the NYSE American of $2.10 per share and
$
4.65
per share on those respective dates. For the three months ended March 31, 2018,
BioTime recorded an unrealized loss of $37.4 million on the OncoCyte shares due to the decrease in OncoCyte stock price from December
31, 2017 to March 31, 2018 (see Note 12).
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.
OncoCyte’s
unaudited condensed results of operations for the three months ended March 31, 2018 and 2017 are summarized below (in thousands):
|
|
Three Months Ended
March 31, 2018
(unaudited)
|
|
|
February 17, 2017
to March 31, 2017
(unaudited)
|
|
|
January 1, 2017 to
February 16, 2017
(unaudited)
|
|
Condensed Statements of Operations
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expense
|
|
$
|
1,461
|
|
|
$
|
1,049
|
|
|
$
|
798
|
|
General and administrative expense
|
|
|
1,732
|
|
|
|
1,651
|
|
|
|
377
|
|
Sales and marketing expense
|
|
|
658
|
|
|
|
442
|
|
|
|
213
|
|
Loss from operations
|
|
|
(3,851
|
)
|
|
|
(3,142
|
)
|
|
|
(1,388
|
)
|
Net loss
|
|
$
|
(3,723
|
)
|
|
$
|
(3,311
|
)
|
|
$
|
(1,392
|
)
|
|
(1)
|
The
condensed unaudited statements of operations information included in the table above
for the period January 1, 2017 through February 16, 2017 reflects OncoCyte results of
operations included in BioTime’s consolidated statement of operations for the
three months ended March 31, 2017, after intercompany eliminations. The information for
OncoCyte shown for period from February 17, 2017 through March 31, 2017 is not included
in BioTime’s consolidated statement of operations for the three months ended March
31, 2017, due to the OncoCyte Deconsolidation on February 17, 2017. The information for
OncoCyte shown for three months ended March 31, 2018 is not included in BioTime’s
consolidated statement of operations for the three months ended March 31, 2018.
|
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 $31.5 million as of March 31, 2018 and a fair value of $48.9 million as of December 31, 2017, based on the
closing price of Asterias common stock on the NYSE American of $1.45 per share and $2.25 per share on those respective dates.
For the three months ended March 31, 2018 and 2017, BioTime recorded an unrealized loss of $17.4 million and $26.1 million on
the Asterias shares, respectively, due to the decrease in Asterias stock price (see Note 12).
Asterias’
unaudited condensed results of operations for the three months ended March 31, 2018 and 2017 are summarized below (in thousands):
|
|
Three Months Ended March 31,
(unaudited)
|
|
|
|
2018
|
|
|
2017
|
|
Condensed Statements of Operations
(1)
:
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
478
|
|
|
$
|
2,010
|
|
Gross profit
|
|
|
415
|
|
|
|
1,957
|
|
Loss from operations
|
|
|
(5,123
|
)
|
|
|
(9,107
|
)
|
Net loss
|
|
$
|
(2,312
|
)
|
|
$
|
(6,287
|
)
|
|
(1)
|
The
condensed unaudited statements of operations information included in the table above reflect Asterias’
results of operations and were not included in BioTime’s condensed consolidated statements of operations.
|
6.
Property, Plant and Equipment, Net
At
March 31, 2018 and December 31, 2017, property, plant and equipment was comprised of the following (in thousands):
|
|
March 31, 2018
(unaudited)
|
|
|
December
31,
2017
|
|
Equipment, furniture and fixtures
|
|
$
|
4,002
|
|
|
$
|
4,255
|
|
Leasehold improvements
|
|
|
4,069
|
|
|
|
4,434
|
|
Accumulated depreciation and amortization
|
|
|
(2,705
|
)
|
|
|
(3,156
|
)
|
Property, plant and equipment, net
|
|
$
|
5,366
|
|
|
$
|
5,533
|
|
Depreciation
expense, including amortization of leasehold improvements, amounted to $281,000 and $216,000 for the three months ended March
31, 2018 and 2017, respectively.
7.
Intangible Assets, Net
At
March 31, 2018 and December 31, 2017, intangible assets,
primarily consisting of acquired
patents, and accumulated amortization were as follows (in thousands):
|
|
March 31, 2018
(unaudited)
|
|
|
December
31,
2017
|
|
Intangible assets
|
|
$
|
23,294
|
|
|
$
|
23,294
|
|
Accumulated amortization
|
|
|
(16,977
|
)
|
|
|
(16,394
|
)
|
Intangible assets, net
|
|
$
|
6,317
|
|
|
$
|
6,900
|
|
BioTime
recognized $582,000 and $602,000 in amortization expense of intangible assets, included in research and development expenses,
during the three months ended March 31, 2018 and 2017, respectively.
8.
Accounts Payable and Accrued Liabilities
At
March 31, 2018 and December 31, 2017, accounts payable and accrued liabilities consisted of the following (in thousands):
|
|
March 31, 2018
(unaudited)
|
|
|
December
31,
2017
|
|
Accounts payable
|
|
$
|
703
|
|
|
$
|
938
|
|
Accrued liabilities
|
|
|
2,010
|
|
|
|
2,368
|
|
Accrued compensation
|
|
|
1,698
|
|
|
|
2,275
|
|
Other current liabilities
|
|
|
292
|
|
|
|
137
|
|
Total
|
|
$
|
4,703
|
|
|
$
|
5,718
|
|
9.
Related Party Transactions
Shared
Facilities and Service Agreements with Affiliates
The
receivables from affiliates shown on the condensed consolidated balance sheet as of March 31, 2018 and December 31, 2017, primarily
represent amounts owed to BioTime from OncoCyte and other affiliates under certain Shared Facilities and Service Agreements
(each a “Shared Facilities Agreement”)
. Under the terms of a 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 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. The allocated cost of BioTime employees
and contractors who provide services is based upon records 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 calendar quarterly basis. 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, 2018, 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.
In
the aggregate, BioTime allocated and charged to OncoCyte Use Fees of $171,000 and $79,000 for general and administrative expenses
and Use Fees of $220,000 and $317,000 for research and development expenses, during the three months ended March 31, 2018 and
2017, respectively. Those charges to OncoCyte are not reflected in revenues but instead BioTime’s general and administrative expenses
and research and development expenses are shown net of those charges in the condensed consolidated statement of operations.
As of March 31, 2018 and December 31, 2017, BioTime has a $2.1 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.
BioTime
has a similar Shared Facilities Agreement with Asterias under which BioTime and Asterias each may provide use of their respective
facilities, utilities, and personnel to the other party on terms similar to the terms of the Shared Facilities Agreement between
BioTime and OncoCyte. As of
March 31, 2018 and
December 31, 2017
, there was a net payable to Asterias of $25,000 and $33,000, respectively.
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 affiliates intend to exercise a right of offset of the receivable
and the payable and to settle the balances net by having the party that owes the other party pay the net balance owed.
Transactions
with Ascendance Biotechnology, Inc.
On
March 21, 2018, AgeX and Ascendance Biotechnology, Inc. (“Ascendance”), an equity method investee of AgeX and former
equity method investee of BioTime, entered into an Asset Purchase Agreement (the “Asset Agreement”) in which AgeX
purchased for $800,000 in cash certain assets consisting in value primarily of in-process research and development assets related
to stem cell derived cardiomyocytes (heart muscle cells) to be developed by AgeX. The transaction was considered an asset acquisition
rather than a business combination in accordance with ASC 805-50,
Business Combinations
. Accordingly, the $800,000 purchase
price was expensed on the acquisition date as acquired in-process research and development as those assets have no alternative
future use. Also on March 21, 2018, BioTime received $0.2 million from Ascendance as settlement of its accounts receivable from
Ascendance.
Disposition
of Ownership Interest in Ascendance
On
March 23, 2018, Ascendance was acquired by a third party in a merger through which AgeX received approximately $3.2 million
in cash for its shares of Ascendance common stock. AgeX recognized a $3.2 million gain as a sale of its equity method investment
in Ascendance, which is included in other income and expenses, net, for the three months ended March 31, 2018. At the close of
the merger, $955,000 of cash that otherwise would have been payable to the Ascendance stockholders was deposited into an escrow
account where it may be held for a term of up to fifteen months. Funds held in the escrow account may be paid to the acquirer
to cover indemnity payments and other obligations that may arise after the merger. After the expiration of the term of the escrow,
any funds remaining in the escrow account will be disbursed, on a pro-rata basis, to the former Ascendance stockholders. As of
March 31, 2018, no amounts have been recorded in the BioTime consolidated financial statements for any funds held in the escrow
account.
Other
related party transaction
In
February 2018,
Alfred D. Kingsley, the Chairman of BioTime’s Board of Directors,
purchased AgeX stock purchase warrants entitling him to purchase 248,600 shares of AgeX common stock at an exercise price of $2.50
per share. AgeX received $124,300, or $0.50 per warrant, from Mr. Kingsley. See Note 10.
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.
10.
Shareholders’ Equity
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.
Common
Shares
At
March 31, 2018, BioTime was authorized to issue 150,000,000 common shares, no par value (see Note 14). As of March 31, 2018, and
December 31, 2017, BioTime had 126,869,140 and 126,865,634 issued and outstanding common shares, respectively.
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 American, 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 continued effectiveness of BioTime’s Registration Statement on Form S-3 which became
effective on May 5, 2017. As of March 31, 2018,
$24.2 million remained available for sale through the Sales Agreement under the Registration Statement.
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.
Issuance
of Certain Cell Cure Warrants
On
July 10, 2017, BioTime purchased all of the outstanding Cell Cure convertible promissory notes and Cell Cure ordinary shares held
by
Hadasit
Bio-Holdings, Ltd. (“HBL”)
,
a former Cell Cure shareholder that owned 21.2% of the issued and outstanding Cell Cure ordinary shares and substantially all
of the Cell Cure convertible promissory notes issued by Cell Cure to shareholders other than BioTime
. As an inducement
to HBL to sell its Cell Cure ordinary shares to BioTime, Cell Cure issued 24,566 warrants to HBL (the “HBL Warrants”)
to purchase Cell Cure ordinary shares at an exercise price of $40.5359 per warrant share, payable in U.S. dollars. The exercise
price of the HBL Warrants is the same price per ordinary share paid by BioTime to HBL for the purchase of the Cell Cure ordinary
shares held by HBL. The HBL Warrants are immediately exercisable and expire on the earliest of the lapse of 5 years from the issuance
date or immediately prior to the closing of a Corporate Transaction or an initial public offering, as defined in the HBL Warrant
Agreement. Since the exercise price is U.S. dollar-denominated and settlement is not expected to occur in the next twelve months,
Cell Cure classified the HBL Warrants as a long-term liability in accordance with ASC 815,
Derivatives and Hedging
. ASC
815 requires freestanding financial instruments, such as warrants, with exercise prices denominated in currencies other than the
functional currency of the issuer to be accounted for as liabilities at fair value, with all subsequent changes in fair value
after the issuance date to be recorded in the statements of operations.
The
fair value of the HBL Warrants at the time of issuance was determined by using the Black-Scholes-Merton option pricing model using
the contractual term of the HBL Warrants. In applying this model, the fair value is determined by applying Level 3 inputs, as
defined by ASC 820; these inputs are based on certain key assumptions including the fair value of the Cell Cure ordinary shares
and the expected stock price volatility over the term of the HBL Warrants. The fair value of the Cell Cure ordinary shares is
determined by Cell Cure’s Board of Directors, which may engage a valuation specialist to estimate the fair value, or may
use recent transactions in Cell Cure shares, if any, as a reasonable approximation of fair value, or may apply other reasonable
methods to determining the fair value. BioTime determines the stock price volatility using historical prices of comparable public
company common stock for a period equal to the remaining term of the HBL Warrants. The HBL Warrants are revalued each reporting
period using the same methodology described above. Changes in any of the key assumptions used to value the HBL Warrants could
materially impact the fair value of the HBL Warrants and BioTime’s consolidated financial statements.
For
the three months ended March 31, 2018, Cell Cure recorded a noncash expense of $79,000 included in general and administrative
expenses for the change in fair value of the HBL Warrants liability. As of March 31, 2018 and December 31, 2017, the HBL Warrants,
valued at $614,000 and $535,000, respectively, were included in other long-term liabilities on the consolidated balance sheets.
Sale
of Warrants by AgeX
On
February 28, 2018, AgeX sold warrants to purchase 1,473,600 shares of AgeX common stock (the “AgeX Warrants”) for
$0.50 per warrant for aggregate cash proceeds to AgeX of $736,800. The AgeX Warrants are exercisable at $2.50 per share
and expire the earliest to occur of (i) February 28, 2021, (ii) on or after January 31, 2019, after notice from AgeX, if the AgeX
shares are publicly traded and the price of AgeX common stock exceeds $3.75 per share for 20 trading days (on a volume weighted
average price basis, as defined), and (iii) a change of control, as defined in warrant agreement. If the AgeX shares are not publicly
traded, the AgeX Warrants may be exercised only during the period commencing ten business days prior to the expiration date, as
defined in the warrant agreement.
The AgeX Warrants are classified as equity since, among
other factors, they are not redeemable, cannot be settled in cash or other assets and require settlement by issuing a fixed number
of shares of common stock of AgeX. The AgeX Warrants were sold at fair value determined on the Binomial Lattice option pricing
model on the issuance date, with certain management assumptions, which included the timing of an initial public offering of AgeX
common stock, peer-group volatility, term to maturity, price cap and AgeX current and future stock prices.
11.
Stock Option Plans
BioTime
adopted the 2012 Equity Incentive Plan (the “2012 Plan”),
under which a maximum
of 16,000,000 BioTime common shares are available 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, 2017
(1)
|
|
|
2,485
|
|
|
|
8,043
|
|
|
|
62
|
|
|
$
|
3.38
|
|
Options granted
|
|
|
(1,239
|
)
|
|
|
1,239
|
|
|
|
-
|
|
|
|
2.58
|
|
Options exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options forfeited/cancelled
|
|
|
56
|
|
|
|
(66
|
)
|
|
|
-
|
|
|
|
3.88
|
|
Restricted stock units vested
|
|
|
-
|
|
|
|
-
|
|
|
|
(6
|
)
|
|
|
-
|
|
March 31, 2018
(1)
|
|
|
1,302
|
|
|
|
9,216
|
|
|
|
56
|
|
|
|
3.27
|
|
Options exercisable at March 31, 2018
|
|
|
|
|
|
|
4,615
|
|
|
|
|
|
|
$
|
3.54
|
|
|
(1)
|
On
October 13, 2017, BioTime’s Board of Directors (the “Board”) determined to temporarily set a 5.0 million
total share limit on shares available for the grant of share-based awards pursuant to the 2012 Plan. As of December 31, 2017,
the total 2.5 million shares available for grant was net of this 5.0 million share restriction. On May 4, 2018, the Board
removed this restriction, thereby increasing shares available for the grant of share-based awards pursuant to the 2012 Plan
to 6.3 million shares as of that date.
|
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)
|
|
|
|
2018
|
|
|
2017
|
|
Expected life (in years)
|
|
|
5.87
|
|
|
|
6.08
|
|
Risk-free interest rates
|
|
|
2.63
|
%
|
|
|
2.07
|
%
|
Volatility
|
|
|
56.09
|
%
|
|
|
59.83
|
%
|
Dividend yield
|
|
|
-
|
%
|
|
|
-
|
%
|
Operating
expenses include stock-based compensation expense as follows (in thousands):
|
|
Three Months Ended March 31,
(unaudited)
|
|
|
|
2018
|
|
|
2017
|
|
Research and development
|
|
$
|
193
|
|
|
$
|
331
|
|
General and administrative
|
|
|
791
|
|
|
|
695
|
|
Total stock-based compensation expense
|
|
$
|
984
|
|
|
$
|
1,026
|
|
12.
Income Taxes
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
by changes in the market prices of the Asterias and OncoCyte shares BioTime holds), BioTime uses the actual year to date effective
tax rate rather than an estimated annual effective tax rate to determine the tax effect of each item, including the use of all
available net operating losses and other credits or deferred tax assets.
Although
the deconsolidation of Asterias and OncoCyte were not taxable transactions to BioTime and did not create a current income tax
payment obligation to BioTime, the market value of the shares of Asterias and OncoCyte common stock BioTime holds creates a deferred
tax liability to BioTime based on the closing prices of the shares, less BioTime’s tax basis in the shares. The deferred
tax liability generated by the Asterias and OncoCyte shares that BioTime holds as of March 31, 2018 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 the deferred tax liability.
This deferred tax liability is determined based
on the closing prices of the Asterias and OncoCyte shares as of March 31, 2018. Due to the inherent unpredictability of future
prices of those shares, 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 prices on the last
stock market trading day of the applicable accounting period, and the related impacts to the valuation allowance and deferred
tax asset changes, are recorded in the accounting period in which they occur.
On
March 23, 2018, Ascendance was acquired by a third party in a merger through which AgeX received approximately $3.2 million
in cash for its shares of Ascendance common stock. For financial reporting purposes, AgeX recognized a $3.2 million gain as a
sale of its equity method investment in Ascendance (see Note 9).
The
sale was a taxable transaction to AgeX generating a taxable gain of approximately $2.2 million. BioTime has sufficient current
year losses from operations to offset the entire gain resulting in no income taxes due.
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 and state income tax purposes, as a result of the deconsolidation of Asterias and OncoCyte and the deferred tax liabilities
generated from the market values of Asterias and OncoCyte shares from the respective deconsolidation dates, including the changes
to those deferred tax liabilities due to changes in the Asterias and OncoCyte stock prices, BioTime’s deferred tax assets
exceeded its deferred tax liabilities as of March 31, 2018 and December 31, 2017. As a result, BioTime established a full valuation
allowance as of March 31, 2018 and December 31, 2017 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, 2018.
As
of March 31, 2017, for federal income tax purposes, BioTime’s deferred tax liabilities exceeded its deferred tax assets
by $3.9 million and, accordingly, 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 for all periods presented and,
accordingly, no state tax provision or benefit was recorded for any period presented.
13.
Commitments and Contingencies
Alameda
Lease
On
December 10, 2015, BioTime entered into a lease for 30,795 square feet of office and laboratory space in two buildings located
in an office park in Alameda, California (the “Alameda Lease”). The term of the 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 Alameda Lease
commenced effective February 1, 2016.
Base
rent under the Alameda Lease on February 1, 2018 was $68,673 per month, and will increase by approximately 3% annually on every
February 1 thereafter during the lease term. The lease payments allocated to the lease liability for leasehold improvements reimbursed
by the landlord are amortized as debt service on that liability over the lease term.
In
addition to base rent, BioTime will pay a pro rata portion of increases in certain expenses, including real property taxes, utilities
(to the extent not separately metered to the leased space) and the landlord’s operating expenses, over the amounts of those
expenses incurred by the landlord. As security for the performance of its obligations under the Alameda Lease, BioTime provided
the landlord with an initial security deposit of approximately $847,000, which was reduced by $423,000 on February 1, 2018 pursuant
to the lease agreement, and will be further reduced by an additional $346,000 after the first thirty-six months of the lease term,
by applying those amounts to future rent payment obligations under the lease, if BioTime is not in default under the Lease. The
security deposit amount under the Alameda Lease is considered restricted cash (see Note 2).
New
York Leased Office Space
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 for use in conducting meetings and other business affairs, on a month-by-month basis, by one of its directors at an
amount that approximates his cost.
Cell
Cure Lease
Cell
Cure has leased 1,128 square meters (approximately 12,142 square feet) of office and laboratory space in Jerusalem, Israel under
a lease that expires between May 30, 2019 and December 31, 2020, with two additional options to extend the lease for 5 years each.
Base monthly rent is NIS 63,402 (approximately U.S. $18,247 per month). In addition to base rent, Cell Cure pays a pro rata share
of real property taxes and certain costs related to the operation and maintenance of the building in which the leased premises
are located.
On
January 28, 2018, Cell Cure entered into another lease agreement with its current landlord for an additional 934 square meters
(approximately 10,054 square feet) of office space in the same facility in Jerusalem, Israel under a lease that expires on December
31, 2025, with two additional options to extend the lease for 5 years each (the “January 2018 Lease”). The January
2018 Lease commenced on April 1, 2018, and includes a leasehold improvement construction allowance of up to NIS 4,000,000 (approximately
up to $1.2 million) from the landlord. The leasehold improvements are expected to be completed by September 30, 2018. Combined
base rent and construction allowance payments, assuming the full allowance is utilized, for the January 2018 Lease will be NIS
93,470 per month (approximately $27,000 per month) beginning on October 1, 2018.
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 will disclose 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.
Other indemnification obligations may arise from agreements disposing of assets. 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, 2018 and December 31, 2017.
Royalty
obligations and license fees
BioTime
and its subsidiaries or affiliates are parties to certain licensing agreements with research institutions, universities and other
parties for the rights to use those licenses and other intellectual property in conducting research and development activities.
These licensing agreements provide for the payment of royalties by BioTime or the applicable party to the agreement on future
product sales, if any. In addition, in order to maintain these licenses and other rights during the product development, BioTime
or the applicable party to the contract must comply with various conditions including the payment of patent related costs and
annual minimum maintenance fees. Annual minimum maintenance fees are approximately $135,000 to $150,000 per year. The research
and development risk for these products is significant. License fees and related expenses under these agreements were immaterial
for the periods presented in the consolidated financial statements provided herein.
Grants
Under
the terms of a grant agreement between Cell Cure and
Israel Innovation Authority (“IIA”)
(formerly the Office of the Chief Scientist of Israel) of the Ministry of Economy and Industry, for the development of
OpRegen
®
,
Cell Cure will be required to pay royalties on future product sales, if any, up to the amounts received from the IIA, plus interest
indexed to LIBOR. Cell Cure’s research and product development activities under the grant are subject to substantial risks
and uncertainties, and performed on a best efforts basis. As a result, Cell Cure is not required to make any payments under the
grant agreement unless it successfully commercializes
OpRegen
®
.
Accordingly,
pursuant to ASC 730-20, the Cell Cure grant is considered a contract to perform research and development services for others and
grant revenue will be recognized as the related research and development expenses are incurred (see Note 2).
Israeli
law pertaining to such government grants contain various conditions, including substantial penalties and restrictions on the transfer
of intellectual property, or the manufacture, or both, of products developed under the grant outside of Israel, as defined by
the IIA.
14.
Subsequent Events
On
April 5, 2018, ReCyte was awarded a grant of up to approximately $386,000 from the National Institutes of Health (NIH). The NIH
grant provides funding for continued development of AgeX’s technologies for treating stroke. The grant funds will be made
available by NIH for payment to ReCyte as allowable expenses are incurred.
On
May 1, 2018, BioTime’s shareholders approved an amendment of its Articles of Incorporation increasing the number of authorized
common shares that BioTime may issue from 150,000,000 shares to 250,000,000 shares.