The following Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to provide information necessary to understand our condensed consolidated financial statements for the three and six months ended
June 30, 2014and 2013, and highlight certain other information which, in the opinion of management, will enhance a reader's understanding of our financial condition, changes in financial condition and results of operations. In particular, the discussion is intended to provide an analysis of significant trends and material changes in our financial position and the operating results of our business during the quarter ended June 30, 2014as compared to the quarter ended June 30, 2013. This discussion should be read in conjunction with our Condensed Consolidated Financial Statements for the three and six months ended June 30, 2014and 2013 and related notes included elsewhere in this Quarterly Report on Form 10-Q. These historical financial statements may not be indicative of our future performance. This Management's Discussion and Analysis of Financial Condition and Results of Operations contains a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risks described throughout this filing, particularly in "Item 1A. Risk Factors," and in our Annual Report on Form 10-K for the year ended December 31, 2013.
We are a biotechnology company focused on the emerging field of regenerative medicine. Our core technologies center on stem cells capable of becoming all of the cell types in the human body, a property called pluripotency. Products made from these "pluripotent" stem cells are being developed by us and our subsidiaries, for use in a variety of fields of medicine. Four of our subsidiaries, Asterias Biotherapeutics, Inc. ("Asterias"),
Cell Cure Neurosciences, Ltd("Cell Cure Neurosciences"), OrthoCyte Corporation("OrthoCyte"), and ReCyte Therapeutics, Inc.("ReCyte") are focused on developing cell based therapeutic products for diseases such as neurological disorders, cancer, age related macular degeneration, orthopedic disorders, and age-related cardiovascular disease. Our commercial strategy targets near-term opportunities such as: Renevia™ a product currently in clinical trials in Europeto facilitate cell transplantation; ReGlyde™ and Premvia™ for tendon and dermatological applications, respectively; PanC-Dx™, a family of novel blood and urine-based cancer screens; our current line of research products including PureStem® cell lines, associated ESpan™ culture media, human embryonic stem cell lines derived by our subsidiary ESI under current good manufacturing practices ("cGMP"); HyStem® hydrogel products; the LifeMap Database Suite and mobile health software products. "Regenerative medicine" refers to an emerging field of therapeutic product development that may allow all human cell and tissue types to be manufactured on an industrial scale. This new technology is made possible by the isolation of human embryonic stem ("hES") cells, and by the development of "induced pluripotent stem ("iPS") cells" which are created from regular cells of the human body using technology that allows adult cells to be "reprogrammed" into cells with pluripotency similar to hES-like cells. These pluripotent hES and iPS cells have the unique property of being able to branch out into each and every kind of cell in the human body, including the cell types that make up the brain, the blood, the heart, the lungs, the liver, and other tissues. Unlike adult-derived stem cells that have limited potential to become different cell types, pluripotent stem cells may have vast potential to supply an array of new regenerative therapeutic products, especially those targeting the large and growing markets associated with age-related degenerative disease. Unlike pharmaceuticals that require a molecular target, therapeutic strategies in regenerative medicine are generally aimed at regenerating affected cells and tissues, and therefore may have broader applicability. Regenerative medicine represents a revolution in the field of biotechnology with the promise of providing therapies for diseases previously considered incurable. The field of regenerative medicine includes a broad range of disciplines, including tissue banking, cellular therapy, gene therapy, and tissue engineering. Our commercial efforts in regenerative medicine include the development and sale of products designed for research applications in the near term as well as products designed for diagnostic and therapeutic applications in the medium and long term. We have also developed and licensed manufacturing and marketing rights to Hextend®, a physiologically balanced blood plasma volume expander used for the treatment of hypovolemia in surgery, emergency trauma treatment, and other applications. Hypovolemia is a condition caused by low blood volume, often from blood loss during surgery or from injury. Hextend® maintains circulatory system fluid volume and blood pressure and helps sustain vital organs during surgery or when a patient has sustained substantial blood loss due to an injury. Hextend® is the only blood plasma volume expander that contains lactate, multiple electrolytes, glucose, and a medically approved form of starch called hetastarch. Hextend® is sterile, so its use avoids the risk of infection. Health insurance reimbursements and HMO coverage now include the cost of Hextend® used in surgical procedures. 21 -------------------------------------------------------------------------------- Hextend® is manufactured and distributed in the United Statesby Hospira, Inc., and in South Koreaby CJ Health Corporation(" CJ Health"), a subsidiary of Cheil Jedang Corp., under license from us. The following table shows our subsidiaries, their respective principal fields of business, our percentage ownership as at June 30, 2014, and the country where their principal business is located: BioTime Subsidiary Field of Business Ownership Country Asterias Research, development and commercialization 70.6% USA Biotherapeutics, of human therapeutic products from stem Inc. cells focused initially in the fields of neurology and oncology BioTime Asia, Stem cell products for research 81% Hong Kong Limited Cell Cure Age-related macular degeneration 62.5% Israel Neurosciences Ltd. Multiple sclerosis Parkinson's disease ES Cell Stem cell products for research, including 100% Singapore International Pte clinical grade cell lines Ltd produced under cGMP LifeMap Sciences, Genetic, disease, and stem cell databases 74.52% USA Inc. LifeMap Sciences, Stem cell database (1) Israel Ltd. LifeMap Solutions, Mobile health software (1) USA Inc. OncoCyte Corporation Cancer diagnostics 75.3%
OrthoCyte Orthopedic diseases, including chronic back 100%
Corporation pain and osteoarthritis ReCyte Therapeutics, Vascular disorders, including 94.8% USA Inc. cardiovascular-related diseases, ischemic conditions, vascular injuries. Stem cell-derived endothelial and cardiovascular related progenitor cells for research, drug testing, and therapeutics
Espy®, HyStem®, Hextend®, PureStem®, and PentaLyte® are registered trademarks of
BioTime, Inc., and Renevia™, ESpan™ and ESI BIO™ are trademarks of BioTime, Inc.ACTCellerate™ is a trademark licensed to us by Advanced Cell Technology, Inc. ReCyte™ is a trademark of ReCyte Therapeutics, Inc.PanC-Dx™ is a trademark of OncoCyte Corporation. OpRegen® is a registered trademark of Cell Core Neurosciencs, Ltd.GeneCards® is a registered trademark of Yeda Research and Development Co. Ltd.We were incorporated in 1990 in the state of California. Our principal executive offices are located at 1301 Harbor Bay Parkway, Alameda, California94502. Our telephone number is (510) 521-3390. 22
Research and Development Expenses
The following table shows the approximate percentages of our total research and development expenses of
$17,469,570and $10,975,825allocated to our primary research and development projects during the three and six months ended June 30, 2014and 2013, respectively. Three Months Ended June 30, Six Months Ended June 30, Company Program 2014 2013 2014 2013 Asterias hESC-based cell therapeutic programs 30.2% 10.6% 30.6% 7.1%
lines, and related research products 8.8% 13.5% 9.3% 13.2% BioTime PureStem® technology -% -% -% 1.8% BioTime Hydrogel therapeutic products and HyStem® research 18.8% 20.6% 17.3% 21.1% BioTime Hextend® 0.2% 0.4% 0.2% 0.4% BioTime HyStem® 3D cell culture platform for cancer drug discovery 1.0% -% 0.7% -% BioTime Asia Stem cell products for research -% 0.1% -% 0.1% Cell Cure Age related macular Neurosciences degeneration (OpRegen® and OpRegen®-Plus), and neurological disease therapeutics 14.5% 18.4% 14.6% 20.8%
LifeMap Sciences Database development and sales
and mobile health software development 9.9% 11.7% 9.6% 11.4% OncoCyte Cancer diagnostics 10.5% 12.6% 10.8% 12.8% OrthoCyte Orthopedic therapeutics 2.0% 6.3% 2.3% 5.5% ReCyte Cardiovascular therapeutics 4.1% 5.8% 4.6% 5.8% Therapeutics Critical Accounting Policies Revenue recognition - We comply with ASC 605-10 and record revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. Grant income and the sale of research products are recognized as revenue when earned. Revenues from the sale of research products are primarily derived from the sale of hydrogels and stem cell products. Royalty revenues consist of product royalty payments. License fee revenues consist of fees under license agreements and are recognized when earned and reasonably estimable and also include subscription and advertising revenue from our online databases based upon respective subscription or advertising periods. We recognize revenue in the quarter in which the royalty reports are received rather than the quarter in which the sales took place. When we are entitled to receive up-front nonrefundable licensing or similar fees pursuant to agreements under which we have no continuing performance obligations, the fees are recognized as revenues when collection is reasonably assured. When we receive up-front nonrefundable licensing or similar fees pursuant to agreements under which we do have continuing performance obligations, the fees are deferred and amortized ratably over the performance period. If the performance period cannot be reasonably estimated, we amortize nonrefundable fees over the life of the contract until such time that the performance period can be more reasonably estimated. Milestone payments, if any, related to scientific or technical achievements are recognized in income when the milestone is accomplished if (a) substantive effort was required to achieve the milestone, (b) the amount of the milestone payment appears reasonably commensurate with the effort expended, and (c) collection of the payment is reasonably assured. Patent costs - Costs associated with obtaining patents on products or technology developed are expensed as general and administrative expenses when incurred. This accounting is in compliance with guidance promulgated by the
Financial Accounting Standards Board("FASB") regarding goodwill and other intangible assets. 23 -------------------------------------------------------------------------------- Intangible assets - Intangible assets with finite useful lives are amortized over estimated useful lives and intangible assets with indefinite lives are not amortized but rather are tested at least annually for impairment. Acquired in-process research and development intangible assets are accounted depending on whether they were acquired as part of an acquisition of a business, or assets that do not constitute a business. When acquired in conjunction with acquisition of a business, these assets are considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts and are capitalized as an asset. If and when development is complete, the associated assets would be deemed finite-lived and would then be amortized based on their respective estimated useful lives at that point in time. However, when acquired in conjunction with an acquisition of assets that do not constitute a business (such as Asterias' acquisition of assets from Geron), in accordance with the accounting rules in ASC 805-50, such intangible assets related to IPR&D are expensed upon acquisition. Research and development - We comply with FASB requirements governing accounting for research and development costs. Research and development costs are expensed when incurred, and consist principally of salaries, payroll taxes, consulting fees, research and laboratory fees, and license fees paid to acquire patents or licenses to use patents and other technology from third parties. Stock-based compensation - We have adopted accounting standards governing share-based payments, which require the measurement and recognition of compensation expense for all share-based payment awards made to directors and employees, including employee stock options, based on estimated fair values. We utilize the Black-Scholes Merton option pricing model. Our determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. The expected term of options granted is derived from historical data on employee exercises and post-vesting employment termination behavior. The risk-free rate is based on the U.S. Treasury rates in effect during the corresponding period of grant. Although the fair value of employee stock options is determined in accordance with recent FASB guidance, changes in the subjective assumptions can materially affect the estimated value. In management's opinion, the existing valuation models may not provide an accurate measure of the fair value of employee stock options because the option-pricing model value may not be indicative of the fair value that would be established in a willing buyer/willing seller market transaction. Treasury stock - We account for BioTimecommon shares issued to subsidiaries for future potential working capital needs as treasury stock on the consolidated balance sheet. We have the intent and ability to register any unregistered shares to support the marketability of the shares. Impairment of long-lived assets - Our long-lived assets, including intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If an impairment indicator is present, we evaluate recoverability by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. If the assets are impaired, the impairment recognized is measured by the amount by which the carrying amount exceeds the estimated fair value of the assets. Deferred license and consulting fees - Deferred license and consulting fees consist of the value of warrants issued to third parties for services, and deferred license fees paid to acquire rights to use the proprietary technologies of third parties. The value of the warrants is being amortized over the lives of the warrants, and deferred license fees over the estimated useful lives of the licensed technologies or licensed research products. The estimation of the useful life of any technology or product involves a significant degree of inherent uncertainty, since the outcome of research and development or the commercial life of a new product cannot be known with certainty at the time that the right to use the technology or product is acquired. We will review its amortization schedules for impairments that might occur earlier than the original expected useful lives. See also Note 5 to the condensed consolidated interim financial statements. Principles of consolidation - Our consolidated financial statements include the accounts of our wholly-owned subsidiaries, OrthoCyte, and ESI, and the accounts of our majority owned subsidiaries, Asterias, ReCyte Therapeutics, OncoCyte, BioTime Asia, Cell Cure Neurosciences, and LifeMap Sciences. All material intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements are presented in accordance with accounting principles generally accepted in the U.S. and with the accounting and reporting requirements of SEC Regulation S-X. 24
Results of Operations
For the three and six months ended
Revenues Three Months Ended June 30, $ Increase/ % Increase/ 2014 2013 Decrease Decrease License fees
$ 300,079 $ 362,249 $ -62,170-17.2% Royalty from product sales 76,109 103,315 -27,206 -26.3% Grant income 640,034 693,480 -53,446 -7.7% Sales of research products and services 90,478 57,281 +33,197 +58.0% Total revenues 1,106,700 1,216,325 -109,625 -9.0% Cost of sales (251,265 ) (180,811 ) +70,454 +39.0% Gross profit 855,435 1,035,514 -180,079 -17.4% Six Months Ended June 30, $ Increase/ % Increase/ 2014 2013 Decrease Decrease License fees $ 594,582 $ 712,078 $ -117,496-16.5% Royalty from product sales 173,996 210,914 -36,918 -17.5% Grant income 1,215,614 777,293 +438,321 +56.4% Sales of research products and services 189,068 124,005 +65,063 +52.5% Total revenues 2,173,260 1,824,290 +348,970 +19.1% Cost of sales (383,179 ) (363,560 ) +19,619 +5.4% Gross profit 1,790,081 1,460,730 +329,351 +22.5% Our license fee revenues amounted to $300,079and $594,582for the three and six months ended June 30, 2014, respectively. License fee revenues for the same periods in 2013 amounted to $362,249and $712,078, respectively. License fee revenues for the six months ended June 30, 2014and 2013 include subscription and advertising revenues of $594,582and $638,148from LifeMap Science's online database business primarily related to its GeneCards® database. Under our license agreements with Hospira and CJ Health, our licensees report sales of Hextend® and pay us the royalties due on account of such sales within 90 days after the end of each calendar quarter. We recognize such revenues in the quarter in which the sales report is received, rather than the quarter in which the sales took place. For example, royalties on sales made during the first quarter 2014 were not recognized until the second quarter of fiscal year 2014. 25 -------------------------------------------------------------------------------- Our royalty revenues from product sales for the six months ended June 30, 2014primarily consist of $61,981of royalties earned by Asterias under license agreements that Asterias acquired as part of the assets received from Geron under the Asset Contribution Agreement. Royalty revenues on sales of Hextend® made by Hospira and CJ Healthduring the period beginning January 1, 2014and ending March 31, 2014which we recognized as revenues in the three months ended June 30, 2014were $55,397compared with $103,315for the three months ended June 30, 2013. This 46% decrease in royalties on sales of Hextend® is attributable to a decrease in the U.S. and in the Republic of Korea. The blood volume expander marketing continues to contract and hospitals continue to shift their purchases to albumin products. Hospira has reported that they have seen a rapid decline in the price of hetastarch-based plasma expanders in the market which could continue to have a negative impact on revenues from the sale of Hextend®. Sales of Hextend® were also suspended by Hospira during January and February of 2014 following the implementation of certain new safety labeling changes mandated by the FDAfor the entire class of hydroxyethyl starch products, including Hextend®. The labeling changes, which may also have contributed to the decline in sales since approval by the FDAin November 2013, include a boxed warning stating that the use of hydroxyethyl starch products, including Hextend®, increases the risk of mortality and renal injury requiring renal replacement therapy in critically ill adult patients, including patients with sepsis, and that Hextend® should not be used in critically ill adult patients, including patients with sepsis. New warning and precaution information is also required along with new information about contraindications, adverse reactions, and information about certain recent studies. In addition, during June 2014, we entered into an amendment of our license agreement with CJ Healththat extended the term of the license and CJ Health'sroyalty payment obligation beyond the expiration date of our Korean patents but reduced the royalty rate by 50%. We expect royalty revenues from sales of Hextend® to continue to decline as a percentage of total revenue. Based on sales of Hextend® that occurred during the second quarter of 2014, we will receive royalties of $51,216from Hospira and we have received $12,080from CJ Healthduring the third quarter of 2014. Total royalties of $63,296for the quarter decreased 21% from royalties of $80,592received during the same period last year. These royalties will be reflected in our financial statements for the third quarter of 2014. Total grant revenue for the three and six months ended June 30, 2014were $640,034and $1,215,614, respectively, representing decrease and increases of approximately 7.7% and 56.4% over grant revenues for the respective periods of the prior year. Grant revenue for the three and six months ended June 30, 2014included $455,488and $881,179, respectively, recognized through Cell Cure Neurosciences, and $184,546and $334,435, respectively from various grants awarded to us by the National Institutes of Health(''NIH'') that will expire at various time during the current year. While revenues increased by 19.1% during the six months ended June 30, 2014, cost of sales increased by only 5.4%, reflecting the fact that grant revenues, which do not give rise to costs of sales, increased by $438,321. Three Months Ended June 30,
$ Increase/ % Increase/
2014 2013 Decrease Decrease Research and development expenses
$ (9,081,137 ) $ (5,530,395 ) $ +3,550,742+64.2% General and administrative expenses (4,835,972 ) (3,621,570 ) +1,214,402 +33.5% Interest (expense)/income, net (10,024 ) 579 -10,603 -1,831.3% Other income/(expense), net 164,732 (80,541 ) +245,273 +304.53% Six Months Ended June 30, $ Increase/ % Increase/ 2014 2013 Decrease Decrease Research and development expenses $ (17,469,570 ) $ (10,975,825 ) $ +6,493,745+59.2% General and administrative expenses (8,503,259 ) (7,005,091 ) +1,498,168 +21.4% Interest (expense)/income, net (18,398 ) 1,522 -19,920 -1,308.8% Other income/(expense), net 242,868 (109,520
) +352,388 +321.75%
Research and development expenses - Research and development expenses for the three and six months ended
June 30, 2014increased to $9,081,137and $17,469,570, respectively, from $5,530,395and $10,975,825for the same periods in 2013. The increase is largely due to the ramp-up of Asterias' operations following its acquisition of stem cell assets from Geron and us through the Asset Contribution Agreement and also the commencement of operations of LifeMap Solutions. 26 -------------------------------------------------------------------------------- The largest component of the increase in research and development expenses during the three months ended June 30, 2014was an increase of $1,279,341in employee compensation, including stock based compensation, employee bonus accruals, and related costs allocated to research and development expenses. The increase in employee compensation reflects, in part, Asterias hiring additional management and scientific personnel, certain Asterias executives and other employees who had been employed on a part-time basis during the same period in 2013 subsequently becoming employed on a full-time basis, and the hiring of three executive level employees at LifeMap Solutions. Other components of the increase in research and development expenses were an increase of $725,425in amortization of intangible assets resulting from Asterias' acquisition of Geron's stem cell assets, an increase of $226,261in consulting services, an increase of $390,338in patents, licenses, and trademark related fees arising primarily from assets that Asterias acquired from Geron, an increase of $116,299in laboratory expenses and supplies at Asterias, an increase of $127,650in depreciation expenses allocated to research and development expenses again largely related to Asterias' asset acquisition, an increase of $141,786in rent and facilities maintenance related expenses allocated to research and development expenses, an increase of $54,745in legal expenses, and an increase of $331,563in CellCure Neurosciences' research and development expenses. The increase in research and development expenses during the six months ended June 30, 2014is attributable to the same factors that contributed to the increase during the second quarter and reflect an increase of $2,567,872in employee compensation, including stock based compensation, employee bonus accruals, and related costs allocated to research and development expenses, an increase of $1,450,850in amortization of intangible assets, an increase of $529,379in consulting services, an increase of $691,974in patents, licenses, and trademark related fees, an increase of $296,035in laboratory expenses and supplies, an increase of $260,587in depreciation expenses allocated to research and development expenses, an increase of $161,328in rent and facilities maintenance related expenses allocated to research and development expenses, an increase of $80,469in travel, lodging, and meals allocated to research and development expenses, and an increase of $267,678in CellCure Neurosciences' research and development expenses.
The following table shows the amount of our total research and development expenses allocated to our primary research and development projects during the six months ended
Six Months Ended June 30, Company Program 2014 2013 Asterias hESC-based cell therapeutic programs
$ 5,341,884 $ 781,989BioTime and ESI PureStem® hEPCs, cGMP hES cell lines, and related research products 1,629,966 1,445,600 BioTime PureStem® technology - 199,447 Hydrogel therapeutic products and BioTime HyStem® research 3,019,683 2,312,730 BioTime Hextend® 31,862 44,163 HyStem® 3D cell culture platform for BioTime cancer drug discovery 117,432 - BioTime Asia Stem cell products for research - 16,055 Cell Cure Neurosciences OpRegen®, OpRegen®-Plus, and neurological disease therapeutics 2,555,712 2,281,952 LifeMap Sciences Database development and sales and mobile health software development 1,680,249 1,248,767 OncoCyte Cancer diagnostics 1,884,284 1,406,873 OrthoCyte Orthopedic therapeutics 405,852 603,438 ReCyte Therapeutics Cardiovascular therapeutics 802,646 634,811 Total research and development expenses $
General and administrative expenses - General and administrative expenses for the three and six months ended
June 30, 2014increased to $4,835,972and $8,503,259, respectively, from $3,621,570and $7,005,091for the same periods in 2013. The increase in general and administrative expenses of $1,214,402and $1,498,168for the three and six months ended June 30, 2014compared to the same periods in 2013 is in part a result of the ramp-up of Asterias' operations. General and administrative expenses include employee and director compensation allocated to general and administrative expenses, consulting fees other than those paid for science-related consulting, insurance costs allocated to general and administrative expenses, stock exchange-related costs, depreciation expense, shipping expenses, marketing costs, legal and accounting costs, and other miscellaneous expenses which are allocated to general and administrative expense. The largest component of the increase in general and administrative expenses was $989,342in employee compensation, including stock-based compensation, employee bonus accruals, and related costs allocated to general and administrative expenses. The increase in employee compensation reflects, in part, the hiring of additional management and administrative personnel at Asterias, certain Asterias executives and other employees who had been employed on a part-time basis during the first quarter of 2013 becoming employed by Asterias on a full-time basis, and the hiring of executives by LifeMap Solutions in connection with the commencement of its operations. 27 -------------------------------------------------------------------------------- Other components of the increase in total general and administrative costs on a consolidated basis for the three months ended June 30, 2014were: an increase of $407,576in accounting, audit and tax related expenses, an increase of $141,320in general consulting expenses; and an increase of $91,983in marketing and advertisement related expenses. These increases are in part offset by: a decrease of $108,390in legal fees, related to transactions under the Asset Contribution Agreement, including preparing registration statements for filing with the SECand a proxy statement for a special meeting of our shareholders, that we incurred in 2013; a decrease of $127,715in investor and public relations expenses, transfer agent, stock listing and registration fees; and a decrease of $84,133in stock-based compensation to consultants. The increase in total general and administrative costs on a consolidated basis for the six months ended June 30, 2014is attributable to the same factors that contributed to the increase during the second quarter and reflect: $1,140,835in employee compensation, including stock-based compensation, employee bonus accruals, and related costs allocated to general and administrative expenses; an increase of $308,379in general consulting expenses; an increase of $213,230in marketing and advertisement related expenses; an increase of $242,015in accounting, audit and tax related expense; an increase of $136,351in rent and facilities maintenance related expenses allocated to general and administrative expenses; and an increase of $120,058in travel, lodging and meals allocated to general and administrative expenses. These increases are in part offset by decreases of $540,445in legal fees, related to transactions under the Asset Contribution Agreement, including preparing registration statements for filing with the SECand a proxy statement for a special meeting of our shareholders, that we incurred in 2013, and a decrease of $160,655in stock-based compensation to consultants. The following table shows the amount of our general and administrative expenses and those related to our subsidiaries during the six months ended June 30, 2014and 2013. Six Months Ended June 30, Company 2014 2013 BioTime $ 3,147,273 $ 3,632,920Asterias $ 2,639,134 $ 1,364,296BioTime Asia $ 3,111 $ 83,341Cell Cure Neurosciences $ 383,073 $ 360,383ES Cell International Pte Ltd $ 118,470 $ 133,902LifeMap $ 1,379,517 $ 824,208OncoCyte $ 375,814 $ 209,048OrthoCyte $ 227,255 $ 198,231ReCyte Therapeutics $ 229,612 $ 198,762
Total general and administrative expenses
Interest income/(expense) - During the three and six months ended
June 30, 2014, we incurred $10,024and $18,398, respectively, of net interest expense. During the same periods in 2013, we earned $579and $1,522of net interest income entirely from cash balances held in interest bearing accounts during 2013. Other income/(expense) - Other income during the three and six months ended June 30, 2014consist primarily of $142,793and $143,824, respectively, in unrealized foreign currency transaction gain by ESI upon remeasurement of amounts owed to BioTimein US dollar. Other income during the six months ended June 30, 2014also includes $119,213earned by Cell Cure Neurosciences on embedded derivatives related to a research contract, based in U.S. dollars, with an Israeli company. This income was offset in part by charitable donations of $17,881made during the first quarter in 2014. Other expense during the same periods in 2013 consist primarily of $92,464and $115,153, respectively of foreign currency transaction loss. Income Taxes - A deferred income tax benefit of approximately $2,862,000was recorded for the six months ended June 30, 2014, of which approximately $2,442,000was related to federal and $420,000was related to state taxes. A deferred income tax benefit of approximately $3,280,000was recorded for the year ended December 31, 2013, of which approximately $2,800,000was related to federal and $480,000was related to state taxes. No tax benefit had been recorded through September 30, 2013because of the net operating losses incurred and a full valuation allowance had been provided. In June 2014, Asterias' sale of BioTimeshares resulted in a taxable gain of approximately $10.3 millionand a tax payable of $4.1 million. This payable, however, is expected to be fully offset by Asterias' available net operating losses thus, resulting in no cash income taxes due from that sale. As of June 30, 2014, Asterias recorded a $4.7 milliondeferred tax liability for the temporary taxable difference in the basis of the investment still held by Asterias in BioTimestock. Both transactions were treated as a deemed distribution by Asterias and recorded against equity. BioTimenet operating losses may not be offset against Asterias gains as the entities file separate tax returns and may not use each other's tax attributes. 28
Liquidity and Capital Resources
June 30, 2014, we had $15,721,508of cash and cash equivalents on hand, of which $12,861,312was held by Asterias. Subsequent to June 30, 2014, Asterias paid $5,000,000in cash to BioTimeas a reimbursement of Asterias' operating expenses paid or incurred by BioTimefor Asterias' account prior to Asterias' receipt of $12,660,908in proceeds from the sale of 5,049,197 BioTimecommon shares and 5,000,000 Asterias common stock purchase warrants during June 2014. See "Cashgenerated by financing activities" below and Note 10 to the condensed consolidated interim financial statements. Our management is working with Asterias' current management and its Board of Directors to better align Asterias' expenditures with available capital resources, and will continue to explore synergistic opportunities at Asterias and BioTimethat may advance product development in a cost effective manner. For example, insight that we have gained from our PureStem® technology might help Asterias improve the purity and efficiency of production of the hES derived progenitor cells that it may use in some of its product development programs. Asterias' management is continuing to evaluate the opportunities for Asterias' stem cell assets in order to select the best paths for the advancement of its key product programs, including paths that can be followed with Asterias' current financial assets and funds that Asterias expects to receive from research grants that have been approved, and those paths that would be open if Asterias were to enter into cooperative development arrangements or obtain new equity capital. As a result of this review of Asterias' key programs, Asterias will allocate its capital to programs that receive third party funding or other support, initially AST-OPC1 for cervical spinal cord injury, and AST-VAC2 as an immunotherapy for the treatment of non-small cell lung cancer, with a reduced level of expenditures on other programs. If third party funding or support is not received, we would expect Asterias to concentrate its resources on those product development programs that provide the best opportunity for near-term progress. In May 2014, Asterias was awarded a $14.3 millionStrategic Partnership III grant by the California Institute for Regenerative Medicine("CIRM") to help fund the clinical development of AST-OPC1. The grant will provide funding for Asterias to reinitiate clinical development of AST-OPC1 in subjects with spinal cord injury, to expand clinical testing of escalating doses in the target population intended for future pivotal trials, and for product development efforts to refine and scale manufacturing methods to support eventual commercialization. Asterias is preparing to initiate the dose escalation Phase 1/2a clinical trial of AST-OPC1 in patients with cervical injuries in six to nine months subject to clearance from the United States Food and Drug Administration("FDA"). The CIRM funding will be conditioned on approval of the trial by the FDA, execution of a definitive agreement between Asterias and CIRM, and continued progress to achieve certain pre-defined project milestones. Asterias is in the process of negotiating with CIRM the funding agreement for the award, including the schedule for disbursement of the awarded funds and the pre-defined project milestones for continued funding. The ability to initiate the Phase 1/2a trial of AST-OPC1 on schedule will be dependent on timely completion of these negotiations, and Asterias' ability to achieve adequate funds disbursements from CIRM during the early period of the award. Asterias has passed the scientific review stage and reached agreement in principle on the funding agreement for a grant from a large United Kingdombased charitable organization to fund Phase I/IIa clinical development of the AST-VAC2 product candidate. Under the proposed grant, Asterias would complete process development and manufacturing scale-up of the AST-VAC2 manufacturing process and would transfer the resulting cGMP-compatible process to the United Kingdomorganization. The United Kingdomorganization would perform and fund both the Phase I/IIa clinical trial of AST-VAC2 in cancer patients and the cGMP manufacturing costs of AST-VAC2. Asterias anticipates completion of negotiations and execution of the funding agreement during the second half of 2014. This same charitable organization had awarded a similar grant for VAC2 to Geron but that grant was withdrawn after Geron terminated the program in November 2011. 29
There can be no assurance that Asterias will receive the grant that it is seeking to fund a clinical trial of AST-VAC2.
Because our revenues are not presently sufficient to cover our operating expenses, we will continue to need to obtain additional equity capital or debt in order to finance our operations. The future availability and terms of equity or debt financing are uncertain. The unavailability or inadequacy of financing or revenues to meet future capital needs could force us to modify, curtail, delay, or suspend some or all aspects of our planned operations. Sales of additional equity securities by us or our subsidiaries could result in the dilution of the interests of present shareholders.
Cash generated by operations
During the six months ended
June 30, 2014, we received $2,519,837of cash in our operations. Our sources of that cash primarily consisted of $1,263,103from the sale of research products and subscription and advertisement revenues, $885,329in foreign research grants to Cell Cure Neurosciences, $197,409of research grant payments from the NIH, and $173,996in royalty revenues on product sales by licensees. During the same six month period in 2013, we received $1,223,490of cash in our operations. Our sources of that cash primarily consisted of $619,637from the sale of research products and subscription and advertisement revenues, our final quarterly research grant payment of $392,664from a CIRM grant approved in 2009 for PureStem® research, $107,598of royalty revenues on sales of Hextend,® a $53,779research grant payment from the NIH, and $48,818in foreign research grants. Cash used in operations During the six months ended June 30, 2014, our total research and development expenditures were $17,469,570and our general and administrative expenditures were $8,503,259. Net loss for the six months ended June 30, 2014amounted to $17,608,835. Net cash used in operating activities during this period amounted to $21,135,249. The net loss for the period includes the following non-cash items: amortization of $2,735,996in intangible assets; $2,212,141in stock-based compensation paid to employees, consultants and directors; $2,862,284in deferred income tax benefit; $522,714in depreciation expenses; $2,034,852in accounts payable and accrued liabilities; $314,601in prepaid expenses and other current assets; $186,386in other long-term liabilities; and $132,876in grant receivables. The net loss for the period does not include a net loss of $3,495,735allocable to the noncontrolling interest in our subsidiaries.
Cash flows from investing activities
During the six months ended
Cash generated by financing activities
During the six months ended
June 30, 2014, we raised gross proceeds of $15,806,316from the sale of 5,040,560 BioTimecommon shares by us and our subsidiaries at a weighted average price of $3.14per share in "at-the-market" transactions through Cantor Fitzgerald & Co. ("Cantor"), as the sales agent. Offers and sales of our common shares for our account through Cantor are made under a Controlled Equity OfferingSM Sales Agreement and have been registered under the Securities Act of 1933, as amended (the "Securities Act"). Under the sales agreement, Cantor may sell our common shares by any method permitted by law deemed to be an "at-the-market" offering as defined in Rule 415 under the Securities Act, including, but not limited to, sales made directly on NYSE MKT, on any other existing trading market for our common shares or to or through a market maker. Cantor may also sell our shares under the sales agreement by any other method permitted by law, including in privately negotiated transactions. Cantor has agreed in the sales agreement to use its commercially reasonable efforts to sell shares in accordance with our instructions (including any price, time or size limit or other customary parameters or conditions we may impose). The offering pursuant to the sales agreement will terminate upon the sale of all shares subject to the sales agreement or the earlier termination of the sales agreement as permitted by its terms. Cantor has also acted as a sales agent for our subsidiaries Asterias, LifeMap Sciences, OncoCyte, and Cell Cure Neurosciences that have sold BioTimecommon shares to raise capital for their operations. The offer and sale of those shares has also been registered under the Securities Act. We contributed the BioTimecommon shares to the subsidiaries in exchange for subsidiary capital stock. The proceeds of the sale of BioTimeshares by our subsidiaries belong to those subsidiaries. There is no assurance that we or our subsidiaries will be able to sell additional common shares through Cantor at prices acceptable to us. 30 -------------------------------------------------------------------------------- On March 4, 2014, BioTimereceived $3,500,000from the sale of 70,000 shares of a newly authorized Series A Convertible Preferred Stock ("Series A Preferred Stock"). The Series A Preferred Stock carries a cumulative annual 3% preferred dividend or $1.50per share, in preference to BioTimecommon shares. Each share of Series A Preferred Stock is convertible, at the election of the holder, into BioTimecommon shares at a conversion price of $4.00per share, a current conversion ratio of 12.5 common shares for each share of Series A Preferred Stock. See Note 7 to the condensed consolidated interim financial statements. On June 16, 2014, Asterias sold 200,000 shares of its Series B common stock to its President and Chief Executive Officer, Pedro Lichtinger, for $468,000in cash, and on June 16, 2014Asterias sold 5,000,000 of its BioTimecommon shares with warrants to purchase 5,000,000 shares of Asterias' Series B common stock to two private investors for $12,500,000in cash. The warrants are exercisable until 5:00 p.m. New Yorktime on June 15, 2015at an exercise price of $2.34per share. The exercise price of the warrants and the number of shares issuable upon the exercise of the warrants are subject to adjustment in the case of stock splits, stock dividends, or certain other transactions. During the six months ended June 30, 2014, BioTimereceived $219,500from the exercise of options by an employee and three directors at a weighted average strike price of $1.91per share.
June 30, 2014, our contractual obligations for the next five years and thereafter were as follows: Principal Payments Due by Period Less Than After Contractual Obligations (1) Total 1 Year 1-3 Years 4-5 Years 5 Years Operating leases (2) $ 12,297,111 $ 906,227 $ 3,548,764 $ 2,579,280 $ 5,262,840Capital lease (3) $ 127,009 $ 26,460 $ 100,549$ - $ -
1) This table does not include payments to key employees that could arise if they
were involuntary terminated or if their employment terminated following a
change in control.
2) Includes the lease of our principal office and laboratory facilities in
our subsidiaries Asterias, ESI, LifeMap Sciences, and Cell Cure Neurosciences.
Also includes two operating leases for lab equipment.
3) Includes one capital lease for lab equipment.
Future capital needs
The operations of our subsidiary Asterias will continue to result in an increase in our operating expenses and losses on a consolidated basis compared to 2013, and will increase our need for additional capital on an ongoing basis. Asterias' research and development efforts will involve substantial expenses that will add to our losses on a consolidated basis for the near future. Also, Asterias is now a public company. As a public company, Asterias will incur costs associated with audits of its financial statements, filing annual, quarterly, and other periodic reports with the
SEC, holding annual shareholder meetings, and public relations and investor relations. These costs will be in addition to those incurred by us for similar purposes. We and our subsidiaries will need to continue to sell BioTimecommon shares from time to time, and our subsidiaries may also seek to raise capital through the sale of their capital stock. We and our subsidiaries will also seek funding for our research and development programs from other sources such as research grants and other arrangements with third parties. We have consolidated the sales and marketing of our research products in a new ESI BIOdivision. As part of this plan, we have shifted our sales and marketing efforts from a website based effort to one that utilizes more sales personnel who may be employees or independent sales representatives. We also plan to expand our product offerings. This effort will require additional expenditures for the development of new research products and the addition of assets and personnel for sales and marketing purposes. 31
The amount and pace of research and development work that we and our subsidiaries can do or sponsor, and our ability to commence and complete the clinical trials that are required in order for us to obtain
FDAand foreign regulatory approval of products, depend upon the amount of money we and our subsidiaries have. Future research and clinical study costs are not presently determinable due to many factors, including the inherent uncertainty of these costs and the uncertainty as to timing, source, and amount of capital that will become available for our projects. The market value and the volatility of our stock price, as well as general market conditions, could impact our ability to raise capital on favorable terms, or at all. Any equity financing that we or our subsidiaries obtain may further dilute or otherwise impair the ownership interests of our current shareholders. If we and our subsidiaries fail to generate positive cash flows or fail to obtain additional capital when required, we and our subsidiaries could modify, delay or abandon some or all of our respective research and development programs.