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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

OR
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to ________

Commission file number 000-55046
 
Asterias Biotherapeutics, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
46-1047971
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)

230 Constitution Drive
Menlo Park, California 94025
 (Address of principal executive offices)

(650) 433-2900
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x    Yes      o    No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x    Yes      o    No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
o
 
Accelerated filer
o
Non-accelerated filer
x
(Do not check if a smaller reporting company)
Smaller reporting company
o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    o    Yes      x    No
 
APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 6,537,779 shares of Series A common stock, $0.0001 par value, and 24,361,040 shares of Series B common stock, $0.0001 par value, as of August 6, 2014.
 


PART 1--FINANCIAL INFORMATION

Statements made in this Report that are not historical facts may constitute forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those discussed. Such risks and uncertainties include but are not limited to those discussed in this Report. Words such as “expects,” “may,” “will,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and similar expressions identify forward-looking statements.

References to “Asterias,” “are” or “we” means Asterias Biotherapeutics, Inc.

The description or discussion, in this Form 10-Q, of any contract or agreement is a summary only and is qualified in all respects by reference to the full text of the applicable contract or agreement.

2

Item 1.
Financial Statements

ASTERIAS BIOTHERAPEUTICS, INC.
(a company in the development stage)

CONDENSED BALANCE SHEETS
 
 
 
June 30, 2014
(Unaudited)
   
December 31,
2013
 
ASSETS
 
   
 
CURRENT ASSETS
 
   
 
Cash and cash equivalents
 
$
12,861,312
   
$
2,171,113
 
Available-for-sale securities, at fair value
   
11,754,494
     
32,052,217
 
BioTime warrants to be distributed to holders of Series A common stock (See Note 2)
   
7,973,508
     
15,568,307
 
Prepaid expenses and other current assets
   
283,319
     
340,092
 
Total current assets
   
32,872,633
     
50,131,729
 
 
               
NONCURRENT ASSETS
               
Intangible assets, net
   
26,840,734
     
28,291,584
 
Equipment and furniture, net
   
1,389,568
     
1,460,518
 
Investment in affiliates
   
415,543
     
415,543
 
Other assets
   
360,983
     
54,423
 
Total noncurrent assets
   
29,006,828
     
30,222,068
 
TOTAL ASSETS
 
$
61,879,461
   
$
80,353,797
 
 
               
LIABILITIES AND STOCKHOLDERS' EQUITY
               
CURRENT LIABILITIES
               
Obligation to distribute BioTime warrants to holders of Series A common stock (See Note 2)
 
$
7,973,508
   
$
15,568,307
 
Amount due to BioTime
   
5,433,850
     
2,064,432
 
Accounts payable
   
253,993
     
567,140
 
Accrued liabilities
   
274,838
     
95,885
 
Total current liabilities
   
13,936,189
     
18,295,764
 
 
               
Long-term liabilities, net deferred tax liability
   
14,244,078
     
8,277,548
 
TOTAL LIABILITIES
   
28,180,267
     
26,573,312
 
 
               
Commitments and contingencies (See Note 10)
               
 
               
STOCKHOLDERS’ EQUITY
               
Preferred Stock, $0.0001 par value, authorized 5,000,000 shares; none issued and outstanding
   
-
     
-
 
Common Stock, $0.0001 par value, authorized 75,000,000 shares Series A, $0.0001 par value, and 75,000,000 shares Series B, $0.0001 par value; 6,537,779 shares Series A common stock and 24,361,040 shares Series B common stock issued and outstanding at June 30, 2014, and 6,537,779 shares Series A common stock and 23,961,040 shares Series B common stock issued and outstanding at December 31, 2013
   
3,070
     
3,050
 
Additional paid-in capital (See Notes 2 and 5)
   
65,312,331
     
79,850,758
 
Accumulated other comprehensive loss on available-for-sale investments
   
(3,389,064
)
   
(2,934,686
)
Deficit accumulated during the development stage
   
(28,227,143
)
   
(23,138,637
)
Total stockholders’ equity
   
33,699,194
     
53,780,485
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
61,879,461
   
$
80,353,797
 
 
See accompanying notes to the condensed interim financial statements.
3

ASTERIAS BIOTHERAPEUTICS, INC.
(a company in the development stage)

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
   
Period from Inception
(September 24, 2012)
 
   
2014
   
2013
   
2014
   
2013
    to June 30, 2014  
REVENUE
 
   
   
   
   
 
Royalties from product sales
 
$
20,712
   
$
-
   
$
82,693
   
$
-
   
$
82,693
 
Cost of sales
   
(41,346
)
   
-
     
(41,346
)
   
-
     
(41,346
)
Total gross (loss)/profit
   
(20,634
)
   
-
     
41,347
     
-
     
41,347
 
 
                                       
EXPENSES
                                       
Research and development
   
(2,742,737
)
   
(589,865
)
   
(5,341,883
)
   
(783,309
)
   
(9,661,378
)
Acquired in-process research and development
   
-
     
-
     
-
     
-
     
(17,458,766
)
General and administrative
   
(1,544,660
)
   
(744,404
)
   
(2,639,134
)
   
(1,366,350
)
   
(7,280,883
)
Total operating expense
   
(4,287,397
)
   
(1,334,269
)
   
(7,981,017
)
   
(2,149,659
)
   
(34,401,027
)
 
                                       
Loss from operations
   
(4,308,031
)
   
(1,334,269
)
   
(7,939,670
)
   
(2,149,659
)
   
(34,359,680
)
 
                                       
OTHER INCOME/(EXPENSE)
                                       
Interest expense, net
   
(5,436
)
   
-
     
(9,536
)
   
-
     
(11,272
)
Gain on sale of fixed assets
   
-
     
-
     
-
     
-
     
2,430
 
Other expense, net
   
(1,548
)
   
-
     
(1,584
)
   
-
     
(1,600
)
Total other expense, net
   
(6,984
)
   
-
     
(11,120
)
   
-
     
(10,442
)
 
                                       
LOSS BEFORE DEFERRED INCOME TAX BENEFIT
   
(4,315,015
)
   
(1,334,269
)
   
(7,950,790
)
   
(2,149,659
)
   
(34,370,122
)
 
                                       
Deferred income tax benefit
   
1,513,258
     
-
     
2,862,284
     
-
     
6,142,979
 
 
                                       
NET LOSS
 
$
(2,801,757
)
 
$
(1,334,269
)
 
$
(5,088,506
)
 
$
(2,149,659
)
 
$
(28,227,143
)
 
                                       
Unrealized loss on available-for-sale securities, net
   
(2,934,686
)
   
(250
)
   
(454,379
)
   
-
     
(3,389,064
)
 
                                       
COMPREHENSIVE LOSS
 
$
(5,736,443
)
 
$
(1,334,519
)
 
$
(5,542,885
)
 
$
(2,149,659
)
 
$
(31,616,207
)
 
                                       
Basic and diluted net loss per common share
 
$
(0.09
)
 
$
(25.81
)
 
$
(0.17
)
 
$
(41.58
)
       
 
                                       
Weighted average shares of common stock outstanding — basic and diluted
   
30,575,742
     
51,700
     
30,537,493
     
51,700
         

See accompanying notes to the condensed interim financial statements.
4

ASTERIAS BIOTHERAPEUTICS, INC.
(a company in the development stage)

CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
 
 
Six Months Ended
June 30,
   
Period from
inception (September
24, 2012) to
 
 
 
2014
   
2013
   
June 30, 2014
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
   
   
 
Net loss
 
$
(5,088,506
)
 
$
(2,149,659
)
 
$
(28,227,143
)
Adjustments to reconcile net loss to net cash provided by/(used in) operating activities:
                       
Acquired in-process research and development (See Note 2)
   
-
     
-
     
17,458,766
 
Depreciation expense
   
269,110
     
36,649
     
489,705
 
Stock-based compensation
   
1,004,844
     
22,439
     
1,708,578
 
Amortization of intangible assets
   
1,450,851
     
-
     
2,176,276
 
Gain on sale of equipment and furniture
   
-
     
-
     
(2,430
)
Deferred income tax benefit
   
(2,862,284
)
   
-
     
(6,142,979
)
Changes in operating assets and liabilities:
                       
Prepaid expenses and other current assets
   
56,773
     
(209,762
)
   
(283,319
)
Accounts payable
   
(313,147
)
   
209,289
     
253,993
 
Accrued liabilities
   
178,953
     
28,032
     
274,838
 
Amount due to BioTime
   
3,369,418
     
2,756,215
     
9,032,596
 
Net cash (used in)/provided by operating activities
   
(1,933,988
)
   
693,203
     
(3,261,119
)
 
                       
CASH FLOWS FROM INVESTING ACTIVITIES:
                       
Purchase of equipment and furniture
   
(198,161
)
   
(573,287
)
   
(1,444,890
)
Proceeds from sale of equipment and furniture
   
-
     
-
     
27,500
 
Proceeds from sale of available-for-sale investments
   
12,660,908
     
-
     
12,660,908
 
Payment of security deposits
   
(306,560
)
   
(54,423
)
   
(360,983
)
Net cash provided by/(used in) investing activities
   
12,156,187
     
(627,710
)
   
10,882,535
 
 
                       
CASH FLOWS FROM FINANCING ACTIVITIES:
                       
 
                       
Proceeds from issuance of common stock
   
468,000
     
-
     
5,468,000
 
Payment to Geron in connection with acquisition of assets on October 1, 2013
   
-
     
-
     
(228,104
)
Net cash provided by financing activities
   
468,000
     
-
     
5,239,896
 
 
                       
Net increase in cash and cash equivalents
   
10,690,199
     
65,493
     
12,861,312
 
Cash and cash equivalents at beginning of period
   
2,171,113
     
-
     
-
 
Cash and cash equivalents at end of period
 
$
12,861,312
   
$
65,493
   
$
12,861,312
 
 
                       
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING AND INVESTING ACTIVITIES:
                       
Purchase of equipment and furniture, contributed by BioTime
 
$
-
   
$
-
   
$
(459,454
)
Available-for-sale BioTime securities contributed by BioTime
 
$
-
   
$
-
   
$
34,985,163
 
Cancellation of indebtedness to BioTime
 
$
-
   
$
-
   
$
5,000,000
 
Transaction costs paid by BioTime, on behalf of the Company
 
$
-
   
$
-
   
$
300,000
 
Intangible assets acquired from Geron
 
$
-
   
$
-
   
$
29,017,009
 
Deferred tax liability arising from difference in book versus tax basis on Geron intangible assets acquired
 
$
-
   
$
-
   
$
11,558,243
 
Investment in affiliates, contributed by BioTime
 
$
-
   
$
-
   
$
415,543
 
Common stock and common stock warrants issued to BioTime and Geron in connection with acquisition and transfer of assets
 
$
-
   
$
-
   
$
74,098,333
 
Common stock issued upon investment by BioTime
 
$
-
   
$
-
   
$
50,000
 
Reduction of subscription receivable
 
$
-
   
$
-
   
$
(50,000
)
Common stock issued in exchange for non-cash consideration in connection with investment by officer
 
$
-
   
$
-
   
$
1,740
 

 
See accompanying notes to the condensed interim financial statements.
5

ASTERIAS BIOTHERAPEUTICS, INC.
NOTES TO THE CONDENSED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)

1. Organization and Basis of Presentation

Asterias Biotherapeutics, Inc. (“Asterias”) (a company in the development stage) was incorporated in Delaware on September 24, 2012. Asterias is a majority-owned and controlled subsidiary of BioTime, Inc. (“BioTime”).

Asterias’ primary focus is the emerging field of regenerative medicine. Asterias’ core technologies center on human embryonic stem (“hES”) cells capable of becoming all of the cell types in the human body, a property called pluripotency. Asterias is developing pluripotent stem-cell based therapies in neurology and oncology, including AST-OPC1 neural cells to treat spinal cord injury, multiple sclerosis and stroke, and AST-VAC2, a pluripotent stem cell-derived cancer vaccine.

Asterias is considered to be in the development stage despite the royalty revenue generated during the six months ended June 30, 2014 as such revenue is not considered significant as defined in Statement of Financial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 915, “Development Stage Entities,” and is subject to the risks associated with activities of development stage companies.

Asterias’ activities through June 30, 2014 primarily related to the preparation and commencement of its planned operations following its acquisition of assets pursuant to an Asset Contribution Agreement, on October 1, 2013. Asterias has selected December 31 as its fiscal year end.

The financial statements presented herein, and discussed below, have been prepared on a stand-alone basis. The financial statements are presented in accordance with accounting principles generally accepted in the U.S. and with the accounting and reporting requirements of Regulation S-X of the Securities and Exchange Commission (“SEC”). BioTime has consolidated the results of Asterias into BioTime’s consolidated results based on BioTime’s ability to control Asterias’ operating and financial decisions and policies through the ownership of Asterias Series B common stock throughout the periods presented. BioTime owns 70.6% of the outstanding shares of Asterias common stock as a whole at June 30, 2014.

BioTime allocates expenses such as salaries and payroll related expenses incurred and paid on behalf of Asterias based on the amount of time that particular employees devote to Asterias affairs. Other expenses such as legal, accounting, travel, and entertainment expenses are allocated to Asterias to the extent that those expenses are incurred by or on behalf of Asterias. BioTime also allocates certain overhead expenses such as insurance, internet, and telephone expenses based on a percentage determined by management. These allocations are made based upon activity-based allocation drivers such as time spent, percentage of square feet of office or laboratory space used, and percentage of personnel devoted to Asterias operations or management. Management evaluates the appropriateness of the percentage allocations on a quarterly basis and believes that this basis for allocation is reasonable.

2. Asset Contribution Agreement with BioTime and Geron Corporation

On January 4, 2013, Asterias entered into an Asset Contribution Agreement with BioTime and Geron Corporation (“Geron”) pursuant to which BioTime and Geron agreed to concurrently contribute certain assets to Asterias in exchange for shares of Asterias common stock and warrants to purchase common stock (the “Asset Contribution”). The transaction closed on October 1, 2013.

6

Transfer of BioTime Assets

Under the Asset Contribution Agreement, BioTime contributed to Asterias 8,902,077 BioTime common shares registered for re-sale under the Securities Act of 1933, as amended; warrants to subscribe for and purchase 8,000,000 additional BioTime common shares (the “BioTime Warrants”) exercisable for a period of five years at a price of $5.00 per share, subject to pro rata adjustment for certain stock splits, reverse stock splits, stock dividends, recapitalizations and other transactions; a 10% common stock interest in BioTime’s subsidiary OrthoCyte Corporation (“OrthoCyte”); a 6% ordinary stock interest in BioTime’s subsidiary Cell Cure Neurosciences, Ltd. (“Cell Cure Neurosciences”); and a quantity of certain hES cell lines produced under “current good manufacturing practices” (“cGMP”) sufficient to generate master cell banks, and non-exclusive, world-wide, royalty-free licenses to use those cell lines and certain patents pertaining to stem cell differentiation technology for any and all purposes.  In return, Asterias issued to BioTime 21,773,340 shares of its Series B common stock, par value $0.0001 per share (“Series B Shares”), and warrants to purchase 3,150,000 Series B Shares, exercisable for a period of three years from the date of issue at an exercise price of $5.00 per share. In addition, BioTime cancelled Asterias’ obligations under a loan of $5,000,000 from BioTime, related to cash financing provided by BioTime during 2013 prior to the Asset Contribution closing.

Because Asterias is a subsidiary of BioTime, the transfer of assets from BioTime was accounted for as a transaction under common control. Non-monetary assets received by Asterias were recorded at their historical cost basis amounts with BioTime. Monetary assets were recorded at fair value. The difference between the value of assets contributed by BioTime and the fair value of consideration issued to BioTime was recorded as an additional contribution by BioTime, in additional paid-in capital.

The assets transferred by BioTime and the related consideration were recorded as follows:

Consideration transferred to BioTime:
 
 
Asterias Series B shares
 
$
52,164,568
 
Warrants to purchase Asterias Series B shares
   
2,012,481
 
Excess of contributed assets’ value over consideration
   
4,800,063
 
Total consideration issued
 
$
58,977,112
 
 
       
Assets transferred by BioTime:
       
BioTime common shares, at fair value
 
$
34,985,163
 
BioTime Warrants, at fair value
   
18,276,406
 
Cancellation of outstanding obligation to BioTime
   
5,000,000
 
Investment in affiliates, at cost
   
415,543
 
Geron asset acquisition related transaction costs paid by BioTime
   
300,000
 
Total assets transferred
 
$
58,977,112
 

The fair value of the Asterias Series B shares issued was estimated at $2.40 per share based on the Asterias enterprise value as determined on January 4, 2013, at the time the Asset Contribution Agreement was negotiated and executed by its parties, and as adjusted for subsequent changes in fair values of assets the parties agreed to contribute. The fair value of the warrants to purchase Asterias Series B shares was computed using a Black-Scholes-Merton option pricing model, which utilized the following assumptions: expected term equal to the contractual term of three years, which is equal to the contractual life of the warrants; risk-free rate of 0.63%; 0% expected dividend yield; 69.62% expected volatility based on the average historical common stock volatility of BioTime and Geron, which were used as Asterias’ common stock does not have a trading history; a stock price of $2.40; and an exercise price of $5.00.

BioTime common shares were valued at $3.93, using the closing price per BioTime common shares on the NYSE MKT on October 1, 2013. The fair value of the BioTime Warrants was computed using a Black-Scholes-Merton option pricing model, which utilized the following assumptions: expected term equal to the contractual term of five years, which is equal to the contractual life of the warrants; risk-free rate of 1.42%; 0% expected dividend yield; 77.6% expected volatility based on historical common stock volatility of BioTime; a stock price of $3.93; and an exercise price of $5.00.

7

The investment in OrthoCyte and Cell Cure Neurosciences represents a non-monetary asset and was recorded at BioTime’s historical cost because BioTime is a common parent to Asterias and those two BioTime subsidiaries.

Geron Assets Acquisition

Under the Asset Contribution Agreement, Geron contributed to Asterias certain patents, patent applications, trade secrets, know-how and other intellectual property rights with respect to the technology of Geron directly related to the research, development and commercialization of certain products and know-how related to hES cells; certain biological materials, reagents, laboratory equipment; as well as clinical trial documentation, files and data, primarily related to GRNOPC1 clinical trials for spinal cord injury and VAC1 clinical trials for acute myelogenous leukemia. Asterias assumed all obligations related to such assets that would be attributable to periods, events or circumstances after the Asset Contribution closing date, including those related certain patent interference proceedings that have since been settled.

As consideration for the acquisition of assets from Geron, Asterias issued to Geron 6,537,779 shares of Series A common stock, par value $0.0001 per share (“Series A Shares”), which Geron had agreed to distribute to its stockholders, on a pro rata basis, subject to applicable legal requirements and certain other limitations (the “Series A Distribution”). Asterias is also obligated to distribute to the holders of its Series A Shares the 8,000,000 BioTime Warrants contributed to Asterias by BioTime. Asterias will distribute the BioTime Warrants as promptly as practicable after notice from Geron that the Series A Distribution has been completed.

In addition, Asterias agreed to bear certain transaction costs in connection with the Asset Contribution, of which $1,519,904 was allocated to the acquisition of assets and $541,800 was allocated to the issuance of equity.

The assets contributed by Geron did not include workforce or any processes to be applied to the patents, biological materials and other assets acquired, and therefore did not constitute a business. Accordingly, the acquisition of the Geron assets has been accounted for as an acquisition of assets in accordance with the relevant provisions of ASC 805-50. Total consideration paid by Asterias, including transaction costs, has been allocated to the assets acquired based on relative fair values of those assets as of the date of the transaction, October 1, 2013, in accordance with ASC 820, Fair Value Measurement.

The assets acquired from Geron and the related consideration paid were recorded as follows:

Consideration paid to Geron:
 
 
Asterias Series A shares, net of share issuance costs of $541,800
 
$
15,121,222
 
Obligation to distribute BioTime Warrants
   
18,276,406
 
Transaction and other costs
   
1,519,904
 
Total consideration paid
 
$
34,917,532
 
Assets acquired from Geron (preliminary allocation):
       
Patents and other intellectual property rights related to hES cells
 
$
29,017,009
 
Deferred tax liability arising from difference in book versus tax basis on Geron intangible assets acquired
   
(11,558,243
)
In-process research and development expensed upon acquisition
   
17,458,766
 
Total assets and in-process research and development acquired
 
$
34,917,532
 

The fair value of the Asterias Series A shares issued was estimated at $2.40 per share based on the estimated Asterias enterprise value as determined by parties at the time the Asset Contribution Agreement was negotiated and executed by its parties on January 4, 2013, as adjusted for subsequent changes in fair values of assets the parties agreed to contribute.

8

The fair value of the obligation to distribute BioTime Warrants equals the fair value of those warrants, which was computed as of the date of the applicable balance sheet using the Black-Scholes-Merton option pricing model. Because the fair value of the BioTime Warrants is expected to always be equal to the fair value of the obligation to distribute them at any date on which those values are determined, the remeasurement of those values will not result in a charge or credit on the statement of operations.

The difference between the fair value of assets contributed by Geron and the fair value of consideration issued to Geron was recorded as an additional contribution by Geron and recorded as additional paid-in capital.

Assets acquired from Geron consist primarily of patents and other intellectual property rights related to hES cells which Asterias intends to license to various parties interested in research, development and commercialization of hES cells technologies, and in-process research and development, which includes biological materials, reagents, clinical trial documentation, files and data related primarily to certain clinical trials previously conducted by Geron, which Geron discontinued in November 2011.

Intangible assets related to in process research and development (“IPR&D”) represent the value of incomplete research and development projects which Asterias intends to continue. In accordance with the accounting rules in ASC 805, such assets, when acquired in conjunction with acquisition of a business, 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 the 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.

The values of the acquired assets were estimated as of October 1, 2013 based upon a preliminary review of those assets which took into account factors such as the condition of the cells, cell lines and other biological materials being contributed, the stage of development of particular technology and product candidates related to patents, patent applications, and know-how, the intended use of these assets and the priority assigned to the development of product candidates to which those assets relate, and the assessment of the estimated useful lives of patents. The amounts allocated to patents and other intellectual property rights that Asterias intends to license, in-process research and development with alternative future uses, and equipment were capitalized as intangible assets and are being amortized over an estimated useful life period of 10 years. The amounts allocated to IPR&D that management determined to have no alternative uses were expensed at the time of acquisition of the related assets in accordance with the requirements of ASC 805-50. The allocation was based on the relative fair value of assets eligible for capitalization and the fair value of assets representing IPR&D before assessing the deferred tax liability arising from the difference in book versus tax basis on Geron intangible assets acquired, which management estimated to be approximately equal. Accordingly, $17,458,766 was capitalized as of December 31, 2013, and $17,458,766 was expensed. These amounts are preliminary as management has not yet completed a detailed assessment and valuation of the acquired assets. Such assessment and valuation is expected to be completed during the fourth quarter of 2014. Accordingly, the amounts included in capitalized intangible assets and expensed IPR&D as of December 31, 2013 are subject to adjustments which could be material.

Asterias is also obligated to pay Geron royalties on the sale of products, if any, that are commercialized in reliance upon patents acquired from Geron, at the rate of 4% of net sales.

Stock and Warrant Purchase Agreement with Romulus

On January 4, 2013, in connection with entering into the Asset Contribution Agreement, Asterias entered into a Stock and Warrant Purchase Agreement with Romulus Films, Ltd (“Romulus”) pursuant to which Romulus agreed to purchase 2,136,000 Series B Shares and warrants to purchase 350,000 additional Series B Shares for $5,000,000 in cash upon the consummation of the Asset Contribution. The warrants are exercisable for a period of three years from the date of issuance at an exercise price of $5.00 per share. On October 1, 2013, the shares and warrants were issued in exchange for $5,000,000 in cash.

9

3. Summary of Significant Accounting Policies
 
Revenue recognition – Asterias complies with ASC 605-10 and records 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. Royalty revenues consist of royalty payments on sales of products under a license agreement. Asterias recognizes revenue in the quarter in which the royalty reports are received rather than the quarter in which the sales took place. When Asterias is entitled to receive up-front nonrefundable licensing or similar fees pursuant to agreements under which Asterias has no continuing performance obligations, the fees are recognized as revenues when collection is reasonably assured. When Asterias receives up-front nonrefundable licensing or similar fees pursuant to agreements under which Asterias does have continuing performance obligations, the fees are deferred and amortized ratably over the performance period. If the performance period cannot be reasonably estimated, Asterias amortizes 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.
 
Development stage company – Asterias complies with the reporting requirements of ASC 915, “Development Stage Entities.”

Unaudited interim condensed financial information – The unaudited interim condensed balance sheet as of June 30, 2014, the unaudited interim condensed statements of operations and comprehensive loss for the three and six months ended June 30, 2014 and 2013, and the period from inception (September 24, 2012) to June 30, 2014, and the unaudited interim condensed statements of cash flows for the six months ended June 30, 2014, and the period from inception (September 24, 2012) to June 30, 2014 have been prepared by Asterias’ management. The balance sheet as of December 31, 2013 is derived from Asterias' annual audited financial statements as of that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  These financial statements should be read in conjunction with Asterias' audited financial statements and related notes included in Asterias' Annual Report on Form 10-K for the year ended December 31, 2013. The unaudited interim condensed financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly our financial position, results of operations and cash flows for the periods ended June 30, 2014. The results of operations for the six months ended June 30, 2014 are not necessarily indicative of the operating results anticipated for the full year of 2014.

Use of estimates – The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and cash equivalents – Asterias considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Available-for-sale securities, at fair value– Marketable equity securities and debt securities not classified as held-to-maturity are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in other comprehensive income. Realized gains and losses, and declines in value judged to be other-than-temporary related to equity securities, are included in other income, except as discussed in Note 5.

Equipment and furniture – Equipment and furniture are stated at cost and are being depreciated using the straight-line method over a period of 36 to 120 months.
 
Intangible assets – Intangible assets with finite useful lives are amortized over their estimated useful lives, and intangible assets with indefinite lives are not amortized but rather are tested at least annually for impairment. The accounting for acquired in-process research and development intangible assets depends on whether they were acquired as part of an acquisition of a business, or as assets that do not constitute a business. When acquired in conjunction with an acquisition of a business, those 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 part of the acquisition of assets from Geron), in accordance with the accounting rules in ASC 805-50, the intangible assets related to IPR&D are expensed upon acquisition.

Impairment of long-lived assets – Asterias’ long-lived assets, including intangible assets, will be 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, Asterias will 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 will be recognized and measured by the amount by which the carrying amount exceeds the estimated fair value of the assets.

Warrants to purchase common stock  Asterias generally accounts for warrants issued in connection with equity financings as a component of equity. None of the warrants issued by Asterias as of June 30, 2014 include a conditional obligation to issue a variable number of shares; nor was there a deemed possibility that Asterias may need to settle the warrants in cash. If Asterias were to issue warrants with a conditional obligation to issue a variable number of shares or with the deemed possibility of a cash settlement, Asterias would record the fair value of the warrants as a liability at each balance sheet date and would record changes in fair value in other income and expense in the statements of operations and comprehensive loss.
 
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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.
Reclassification  Certain prior year amounts in the statement of cash flows have been reclassified to conform to the current year presentation.
Research and development – Research and development costs are expensed when incurred, and consist principally of salaries, payroll taxes, consulting fees, research and laboratory fees, rent of office, research and laboratory facilities, and fees paid to acquire patents or licenses.

Income taxes  In 2014, Asterias will file its own tax return including its activity for the entire 2014 calendar year. Prior to the period ended December 31, 2013, Asterias’ operations through September 30, 2013 were included in BioTime’s consolidated U.S. federal and certain state income tax returns. For the period from October 1, 2013 through December 31, 2013 Asterias filed separate tax returns. The provision for income taxes was previously determined as if Asterias had filed separate tax returns for the periods presented. Accordingly, the effective tax rate of Asterias in periods subsequent to December 31, 2013 could vary from its historical effective tax rates depending on the future legal structure of Asterias and related tax elections. Asterias accounts for income taxes in accordance with the accounting principles generally accepted in the United States, which prescribe the use of the asset and liability method, whereby deferred tax asset or liability account balances are calculated at the balance sheet date using current tax laws and rates in effect. Valuation allowances are established when necessary to reduce deferred tax assets when it is more likely than not that a portion or all of the deferred tax assets will not be realized. The guidance also prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not sustainable upon examination by taxing authorities. Generally, Asterias is subject to income tax examinations by major taxing authorities for all years since inception. Asterias will recognize accrued interest and penalties related to unrecognized tax benefits as income tax expense. No amounts were accrued for the payment of interest and penalties as of June 30 2014 and June 30, 2013. Management is currently unaware of any tax issues under review.

A deferred income tax benefit of approximately $2,862,000 was recorded for the six months ended June 30, 2014, of which approximately $2,442,000 was related to federal and $420,000 was related to state taxes. A deferred income tax benefit of approximately $3,280,000 was recorded for the year ended December 31, 2013, of which approximately $2,800,000 was related to federal and $480,000 was related to state taxes. No tax benefit had been recorded through September 30, 2013 because of the net operating losses incurred and a full valuation allowance had been provided.
 
In June 2014, Asterias’ sale of BioTime shares resulted in a taxable gain of approximately $10.3 million and 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 million deferred tax liability for the temporary taxable difference in the basis of the investment still held by Asterias in BioTime stock.  Both transactions were treated as a deemed distribution by Asterias and recorded against equity.  
 
Stock-based compensation – Asterias 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. Consistent with those guidelines, Asterias utilizes the Black-Scholes-Merton option pricing model. Asterias' determination of fair value of share-based payment awards on the date of grant using that option-pricing model is affected by Asterias' stock price as well as by assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, Asterias' 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.

11

Fair value of financial instruments – ASC 820, Fair Value Measurements, clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.
 
ASC 820 requires that the valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820 establishes a three tier value hierarchy, which prioritizes inputs that may be used to measure fair value as follows:

· Level 1Observable inputs that reflect quoted prices for identical assets or liabilities in active markets.

· Level 2Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

· Level 3Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
 
The carrying amounts of current assets and current liabilities approximate their fair value because of the relatively short period until they mature or are required to be settled, except for the investment in BioTime shares, and BioTime Warrants and related obligation to distribute the BioTime Warrants, which are carried at fair value based on Level 1 inputs.

Comprehensive income/loss – ASC 220, Comprehensive Income, requires that an entity’s change in equity or net assets during a period from transactions and other events from non-owner sources be reported. Asterias reports unrealized gains and losses on its available-for-sale securities as other comprehensive income (loss).

Loss per share – Basic net loss per share is computed by dividing net loss attributable to Asterias by the weighted-average number of shares of common stock outstanding for the period. Diluted net loss per share reflects the weighted-average number of shares of common stock outstanding plus the potential effect of dilutive securities or contracts which are convertible to common stock, such as options and warrants (using the treasury stock method) and shares issuable in future periods, except in cases where the effect would be anti-dilutive.

The computations of basic and diluted net loss per share are as follows:

 
 
Six Months Ended June 30,
 
 
2014
   
2013
 
Net loss
$(5,088,506)
 
$(2,149,659)
 
Weighted average shares of common stock – basic and diluted
30,537,493
 
51,700
 
Net loss per share – basic and diluted
$0.17
 
$41.58
 

The following common stock equivalents were excluded from the computation of diluted net loss per share of common stock for the periods presented because including them would have been antidilutive:

 
Six Months Ended June 30,
 
 
2014
   
2013
 
Stock options under Equity Incentive Plan
3,715,415
  2,580,208  

Effect of recently issued and recently adopted accounting pronouncements  The following accounting standards, which are not yet effective, are presently being evaluated by Asterias to determine the impact that they might have on its financial statements.

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09 “Revenue from Contracts with Customers” (Topic 606). The guidance of this Update effects any entity that either issues contracts with customers or transfers goods or services or enters into contracts for the transfer of non-financial assets. The core principal of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in the amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. To achieve those core principals, the ASU specifies steps that the entity should apply for revenue recognition. The guidance also specifies the accounting for some costs to obtain or fulfill the contract with customer and disclosure requirements to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. For a public entity, ASU No. 2014-10 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted.  Asterias is currently evaluating the impact of the adoption of the ASU on its financial statements.

In May 2014, the FASB issued ASU No. 2014-10 “Development Stage Entities” (Topic 915). The objective of the ASU is to improve financial reporting by reducing the cost and complexity of associated with the incremental reporting requirements for development stage entities. The ASU removes all incremental financial reporting requirements from U.S. GAAP for development stage entities, including the inception-to-date information and certain other disclosures. The ASU also eliminates an exception provided to development stage entities in Topic 810 “Consolidation” for determining whether an entity is a variable interest entity on the basis of amount of investment equity at risk. For public business entities, those amendments are effective for annual reporting periods beginning after December 15, 2014, and interim periods therein. Early application is not permitted. Asterias is currently evaluating the impact of the adoption of the ASU on its financial statements.

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In June 2014, the FASB issued ASU No. 2014-12 “Compensation – Stock Compensation” (Topic 718). The ASU provides guidance for accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. That is the case when an employee is eligible to retire or otherwise terminate employment before the end of the period in which a performance target (for example, profitability target) could be achieved and still be eligible to vest in the award if and when the performance target is achieved. The ASU requires a performance target that effects vesting and that could be achieved after the requisite service period be treated as a performance condition. Compensation cost should be recognized in the period in which it becomes probable that such performance condition would be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. For public business entities, the ASU is effective for annual reporting periods beginning after December 15, 2015, and interim periods therein. Early application is permitted. Asterias is in the process of evaluating the impact of adoption of the ASU on its financial statements.
4. Balance Sheet Components

Equipment and Furniture, Net

At June 30, 2014 and 2013, equipment and furniture were comprised of the following:

 
 
June 30, 2014
(Unaudited)
   
December 31,
2013
 
Equipment and furniture
 
$
1,879,273
   
$
1,681,113
 
Accumulated depreciation
   
(489,705
)
   
(220,595
)
Equipment and furniture, net
 
$
1,389,568
   
$
1,460,518
 

Depreciation expense amounted to $269,110 and $36,649 for the six months ended June 30, 2014 and 2013, respectively.

5. Investment in BioTime and in BioTime Subsidiaries

Investment in BioTime

At June 30, 2014, Asterias held 3,852,880 of the 8,902,077 BioTime common shares that Asterias received in the Asset Contribution, and which are included at fair value in current assets in its balance sheet as the shares are available for use and could be sold at fair value for liquidity purposes at any time. The investment is classified as “available-for-sale.” Available-for-sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported in other comprehensive income. Realized gains and losses, and declines in value judged to be other-than-temporary related to equity securities, are included in investment income/loss, except as discussed below.

During June 2014, Asterias sold 5,000,000 of its BioTime common shares with warrants to purchase 5,000,000 Asterias Series B Shares to two investors for $12,500,000 in cash. Broadwood Partners, L.P., BioTime’s largest shareholder, purchased 1,000,000 of the BioTime common shares with 1,000,000 Asterias warrants. One of BioTime’s directors, Neal C. Bradsher, is President of Broadwood Partners, L.P., the investment manager of Broadwood Partners, L.P., and one of Asterias’ directors, Richard T. LeBuhn, is Senior Vice President of Broadwood Capital, Inc. The exercise price of the warrants is $2.34. The exercise price and the number of shares of Asterias common stock issuable upon the exercise of the warrants are subject to adjustment in the event of a stock split, stock dividend, combination of shares, recapitalization or certain other transactions. The warrants will expire on June 15, 2015 if not exercised by that date. During June 2014, Asterias also sold 49,197 BioTime common shares in “at-the-market” transactions for gross proceeds of $160,908 in the open market through Cantor Fitzgerald & Co., acting as Asterias’ sales agent.

The gross proceeds totaling $12,660,908 received in June 2014 from Asterias' sale of BioTime common stock with warrants to purchase Asterias shares were allocated to the BioTime common shares and Asterias warrants based on their relative fair values resulting in $9,477,017 and $3,183,891 of the proceeds being allocated to the common shares and warrants, respectively. This resulted in Asterias recording in a realized loss of $10,466,327 on the sale of the BioTime shares. The loss has been accounted for as a capital transaction and recorded as a reduction of additional paid in capital in the accompanying balance sheet at June 30, 2014. The loss was calculated using a cost basis of $19,843,344, or $3.93 per share, for the BioTime common shares reflecting the closing price of BioTime common shares as reported on the NYSE MKT on October 1, 2013, the date Asterias acquired those shares from BioTime under the Asset Contribution Agreement. See Note 2. The relative fair value of the Asterias warrants was calculated applying the Black-Scholes-Merton formula using the following assumptions: expected term of one year, the contractual life of the warrants; risk-free rate of 0. 11%; 0% expected dividend yield; 94.88% expected volatility based on the average historical common stock volatility of BioTime and Geron (which were used because Asterias’ common stock does not have a trading history); a stock price of $2.34; and an exercise price of $2.34, and may not reflect the value that the warrants would bring if a trading market for the warrants existed. Asterias also recorded an unrealized net loss of $3,389,064 in other comprehensive loss, which is attributed to an unrealized loss on the remaining 3,852,880 BioTime common shares held by Asterias on June 30, 2014. For the period from October 1, 2013 to December 31, 2013, Asterias recorded an unrealized net loss of $2,934,686 in other comprehensive loss, which is attributed to an unrealized loss on the 8,902,077 BioTime common shares then held by Asterias.

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Asterias reviews various factors in determining whether it should recognize an other-than-temporary impairment charge for its marketable securities, including its intent and ability to hold the investment for a period of time sufficient for any anticipated recovery in market value, and the length of time and extent to which the fair value has been less than its cost basis. Based on consideration of these factors, as of June 30, 2014, no other-than-temporary impairment was recognized.

Investments in Affiliates

Asterias’ investments in the OrthoCyte and Cell Cure Neurosciences stock received from BioTime were recorded at BioTime’s historical costs. The investment is carried using the cost method of accounting.

6. Investment in BioTime Warrants and Related Obligation to Distribute BioTime Warrants

As part of the consideration for the issuance of Series B Shares to BioTime in the Asset Contribution, Asterias received the BioTime Warrants. As part of the agreement, Asterias is obligated to distribute the BioTime Warrants to holders of its Series A Shares as promptly as practicable after notice from Geron that the Series A Distribution has been completed. This obligation can only be settled by distribution of the BioTime Warrants received in the Asset Contribution and is not subject to change with changes in the value of the underlying BioTime common shares, or due to any other factors.

Both the BioTime Warrants and the corresponding obligation to distribute them will be remeasured at fair value at each balance sheet date by applying a Black-Scholes-Merton option pricing model using assumptions deemed appropriate as of the applicable date. Because the fair value of the BioTime Warrants is expected to always be equal to the fair value of the obligation to distribute those warrants at any date on which those values are determined, remeasurement of those values will not result in a charge or credit on the statement of operations and comprehensive loss. The estimated fair value of the BioTime Warrants and the corresponding obligation to distribute them as of June 30, 2014 was $7,973,508, based on a $5.00 exercise price, a $3.05 closing price on June 30, 2014, a 4.25 year term, 57.45% volatility, and a 1.5% discount rate. The estimated fair value of the BioTime Warrants and the corresponding obligation to distribute them as of December 31, 2013 was $15,568,307 based on a $5.00 exercise price, a $3.60 closing price on December 31, 2013, a 4.75 year term, 75.86% volatility, and a 1.75% discount rate. Because any increase or decrease in value of the BioTime Warrants accrues to the benefit of the holders of Series A Shares, and not to Asterias, the financial statements do not include and gain or loss related to any increases or decreases in value subsequent to October 1, 2013.

7. Intangible assets

As of June 30, 2014, Asterias had capitalized intangible assets acquired from Geron, primarily related to patents and other intellectual property rights related to hES cells. Those assets are being amortized over an estimated economic life of 10 years on a straight-line basis, which approximates the pattern of consumption over the estimated useful lives of the assets.

Intangible assets net of accumulated amortization at June 30, 2014 and 2013 is shown in the following table:

 
 
June 30, 2014
(Unaudited)
   
December 31,
2013
 
 
 
   
 
Intangible assets
 
$
29,017,009
   
$
29,017,009
 
Accumulated amortization
   
(2,176,275
)
   
(725,425
)
Intangible assets, net
 
$
26,840,734
   
$
28,291,584
 
 
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Amortization of currently held intangible assets for periods subsequent to June 30, 2014 is estimated as follows:

 
 
Amortization
 
Year
 
Expense
 
2014
 
$
1,450,851
 
2015
   
2,901,701
 
2016
   
2,901,701
 
2017
   
2,901,701
 
2018 2,901,701
Thereafter
   
13,783,079
 
Total
 
$
26,840,734  

8. Common Stock and Warrants on Common Stock

At June 30, 2014, Asterias had outstanding 6,537,779 Series A Shares and 24,361,040 Series B Shares. The Series A Shares and Series B Shares are identical in substantially all respects and will vote together as a single class, without distinction as to series on all matters except as may otherwise be required by Delaware law. The two significant differences between the Series A Shares and Series B shares are:

· Asterias may declare and pay dividends or other distributions on Series A Shares without paying a corresponding dividend or distribution on the Series B Shares. This difference in dividend and distribution rights will allow Asterias to distribute the BioTime Warrants to the holders of the Series A Shares in the Series A Distribution. Asterias plans to effect the distribution of the BioTime Warrants to holders of the Series A Shares as promptly as practicable after Geron notifies Asterias of the completion of the Series A Distribution.

· The Series B Shares may be converted into Series A Shares, at Asterias’ election, at any time by resolution of the Board of Directors after Asterias distributes the BioTime Warrants to the holders of the Series A Shares. Each Series B Share will be convertible into one Series A Share, provided, that in the event of any stock split, reverse stock split, stock dividend, reverse stock dividend, or similar transaction with respect to either the Series A Shares or Series B Shares, Asterias will undertake a corresponding stock split, reverse stock split, stock dividend, reverse stock dividend, or similar transaction with respect the other series of common stock as well so that the ratio of outstanding shares of the two series will remain the same.
 
Common Stock Issuance
 
During June 2014, Asterias sold 200,000 shares of Series B common stock at $2.34 per share for $468,000 to Pedro Lichtinger, its President and Chief Executive Officer.
 
Accounting for Asterias Warrants

At June 30, 2014, Asterias had outstanding warrants to purchase 8,500,000 of its Series B Shares. The value received by Asterias for the issuance of the warrants was accounted for as a component of equity because the warrants did not include any conditional obligations to issue a variable number of shares, nor was there a deemed possibility that Asterias may need to settle the warrants in cash.

9. Equity Incentive Plan

During March 2013, Asterias’ Board of Directors approved an Equity Incentive Plan (the “Plan”) under which Asterias has reserved 4,500,000 shares of common stock for the grant of stock options or the sale of restricted stock. Initially, Asterias will issue Series B Shares under the Plan, but upon the conversion of all of the outstanding Series B Shares into Series A Shares, Asterias will issue Series A Shares under the Plan. The Plan also permits Asterias to issue such other securities as its Board of Directors or the Compensation Committee administering the Plan may determine. Asterias’ stockholders approved the Plan in September 2013.

No options may be granted under the Plan more than ten years after the date upon which the Plan was adopted by the Board of Directors, and no options granted under the Plan may be exercised after the expiration of ten years from the date of grant. Under the Plan, options to purchase common stock may be granted to employees, directors and certain consultants at prices not less than the fair market value at date of grant, subject to certain limited exceptions for options granted in substitution of other options. Options may be fully exercisable immediately, or may be exercisable according to a schedule or conditions specified by the Board of Directors or the Compensation Committee. The Plan also permits Asterias to award restricted stock for services rendered or to sell common stock to employees subject to vesting provisions under restricted stock agreements that provide for forfeiture of unvested shares upon the occurrence of specified events under a restricted stock award agreement. Asterias may permit employees or consultants, but not officers or directors, who purchase stock under restricted stock purchase agreements, to pay for their shares by delivering a promissory note that is secured by a pledge of their shares.

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Asterias may also grant stock appreciation rights (“SARs”) and hypothetical units issued with reference to Asterias common stock (“Restricted Stock Units”) under the Plan. A SAR is the right to receive, upon exercise, an amount payable in cash or shares or a combination of shares and cash, as determined by the Board of Directors or the Compensation Committee, equal to the number of shares subject to the SAR that is being exercised multiplied by the excess of (a) the fair market value of a share of Asterias common stock on the date the SAR is exercised, over (b) the exercise price specified in the SAR Award agreement.

The terms and conditions of a grant of Restricted Stock Units will be determined by the Board of Directors or Compensation Committee. No shares of stock will be issued at the time a Restricted Stock Unit is granted, and Asterias will not be required to set aside a fund for the payment of any such award. A recipient of Restricted Stock Units will have no voting rights with respect to the Restricted Stock Units. Upon the expiration of the restrictions applicable to a Restricted Stock Unit, Asterias will either issue to the recipient, without charge, one share of common stock per Restricted Stock Unit or cash in an amount equal to the fair market value of one share of common stock.

On June 9, 2014 Pedro Lichtinger, President and Chief Executive Officer of Asterias, received 200,000 shares of “Restricted Stock” under the Equity Incentive Plan which is subject to restrictions on transfer and to forfeiture until the shares vest. The Restricted Stock vest at the rate of 16,667 shares per month while Mr. Lichtinger remains employed by Asterias.

Options Granted

As of June 30, 2014, Asterias had granted to certain officers, employees, and directors, options to purchase a total of 3,715,415 Series B Shares at exercise price of $2.34 per share. The following table summarizes stock option activity during the six months ended June 30, 2014:

 
 
Shares
 
Outstanding at January 1, 2014
 
2,840,000
 
Granted
 
1,465,000
 
Exercised
 
-
 
Forfeited
 
(589,585)
 
Outstanding at June 30, 2014
 
3,715,415
 
Exercisable at June 30, 2014
 
1,200,729
 

The fair value of each stock option is estimated on the grant date using the Black-Scholes-Merton option-pricing model using the following assumptions:

 
 
June 30 2014
(Unaudited)
 
Risk-free interest rate
  0.42 -
 1.225%
 
Dividend yield
 
-
 
 
Volatility
  69.37 -
 83.98%
 
Expected term (years)
  2.72 -
 4.18
 

The risk-free rate is based on the rates in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to each grant’s expected life. A dividend yield of zero is applied since Asterias has not historically paid dividends and has no intention to pay dividends in the near future. The expected volatility is based upon the volatility of a group of publicly traded industry peer companies. The expected term of options granted is calculated using the simplified method under Staff Accounting Bulletin No. 107.

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The weighted-average fair value of options granted and outstanding as of June 30, 2014 was $8,694,071.

Employee stock-based compensation expense recorded is calculated and recorded based on awards ultimately expected to vest and has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and will be revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Operating expenses for the six months ended June 30, 2014 and 2013, respectively, include stock-based compensation as follows:
 
 
Six Months Ended June 30,
 
2014
2013
Research and development
 
$
238,232
   
$
-
 
General and administrative
   
766,612
     
22,439
 
Total stock-based compensation expense
 
$
1,004,844
   
$
22,439
 

10. Commitments and Contingencies

Asterias had commitments consisting of obligations under a sublease of its current office and research facility and under a lease for its future office and research facility.

As of June 30, 2014, remaining minimum lease and sublease payments were as follows:

Year
 
Minimum Lease
Payments
 
2014
 
$
487,714
 
2015
   
1,578,667
 
2016
   
1,234,200
 
2017
   
1,271,160
 
2018     1,308,120  
Thereafter
   
5,262,840
 
Total
 
$
11,142,701
 

11. Shared Facilities and Service Agreement

On April 1, 2013, Asterias and BioTime executed a Shared Facilities and Services Agreement (“Shared Facilities Agreement”). Under the terms of the Shared Facilities Agreement, BioTime will allow Asterias to use its premises and equipment located at Alameda, California for the sole purpose of conducting business. BioTime will provide basic accounting, billing, bookkeeping, payroll, treasury, collection of accounts receivable (excluding the institution of legal proceedings or taking of any other action to collect accounts receivable), payment of accounts payable, and other similar administrative services to Asterias. BioTime may also provide the services of attorneys, accountants, and other professionals who may also provide professional services to BioTime and its other subsidiaries. BioTime will also provide Asterias with the services of its laboratory and research personnel, including BioTime employees and contractors, for the performance of research and development work for Asterias at the premise.

BioTime will charge Asterias a fee for the services and usage of facilities, equipment, and supplies aforementioned. For each billing period, BioTime will equitably prorate and allocate its employee costs, equipment costs, insurance costs, lease costs, professional costs, software costs, supply costs, and utilities costs, between BioTime and Asterias based upon actual documented use and cost by or for Asterias or upon proportionate usage by BioTime and Asterias, as reasonably estimated by BioTime. Asterias shall pay 105% of the allocated costs (the “Use Fee”). The allocated cost of BioTime employees and contractors who provide services will be based upon records maintained of the number of hours of such personnel devoted to the performance of services.

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The Use Fee will be determined and invoiced to Asterias on a quarterly basis for each calendar quarter of each calendar year. If the Shared Facilities Agreement terminates prior to the last day of a billing period, the Use Fee will be determined for the number of days in the billing period elapsed prior to the termination of the Shared Facilities Agreement. Each invoice will be payable in full by Asterias 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 Asterias 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 Asterias.

In addition to the Use Fees, Asterias 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 Asterias, provided that invoices documenting such costs are delivered to Asterias with each invoice for the Use Fee. Furthermore, BioTime will have no obligation to purchase or acquire any office supplies or other goods and materials or any services for Asterias, and if any such supplies, goods, materials or services are obtained for Asterias, BioTime may arrange for the suppliers thereof to invoice Asterias directly.

Asterias in turn may charge BioTime or any Other Subsidiary for similar services provided by Asterias at the same rate and terms as aforementioned. “Other Subsidiary” means a subsidiary of BioTime other than Asterias and other than a subsidiary of Asterias.

The Shared Facilities Agreement terminates on December 31, 2016, provided that, unless otherwise terminated under another provision of the Shared Facilities Agreement, the term of the Shared Facilities Agreement will automatically be renewed and the termination date will be extended for an additional year each year after December 31, 2016, unless either party gives the other party written notice stating that the Shared Facilities Agreement will terminate on December 31 of that year.

BioTime allocated $75,912 and $41,710 of general overhead expenses as well as $11,731 and $0 of research and development overhead to Asterias during the six months ended June 30, 2014 and 2013, respectively. In addition, BioTime allocated $135,126 and $108,585 of salaries and related charges to general and administrative expenses, and $6,658 and $6,951 of salaries and related charges to research and development expenses,  during the six months ended June 30, 2014 and 2013, respectively.

12. Subsequent Events

We evaluated subsequent events through the issuance date of the financial statements.  We are not aware of any significant events, that occurred subsequent to the balance sheet date but prior to the filing of this Quarterly Report on Form 10-Q that would have a material impact on our financial statements.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to provide information necessary to understand our unaudited interim condensed financial statements for the three and six months ended June 30, 2014 and 2013 and for the period from September 24, 2012 (our date of inception) to June 30, 2014, 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 three and six months ended June 30, 2014 as compared to the three and six months 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, 2014 and 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 "Risk Factors" in this Report and in our Annual Report on Form 10-K.

Overview

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. We plan to develop pluripotent stem-cell based therapies in neurology and oncology, including AST-OPC1 neural cells to treat spinal cord injury, multiple sclerosis and stroke, and AST-VAC2, a pluripotent stem cell-derived cancer vaccine.

“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 much like hES cells. 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. We believe that regenerative medicine represents a revolution in the field of biotechnology with the promise of providing therapies for diseases previously considered incurable.

Business Strategy

By acquiring Geron’s stem cell assets, we now have the use of cell lines and other biological materials, patents, and technology developed by Geron over 12 years of work focused in the following complementary areas:

· The establishment of cell banks of undifferentiated hES cells produced under current good manufacturing practices (“cGMP”) and suitable for the manufacture of differentiated cells for human therapeutic use;

· The development of scalable differentiation methods which convert, at low cost, undifferentiated hES cells into functional cells suitable for human therapeutic use that can be stored and distributed in the frozen state for “off-the-shelf” use;

· The development of regulatory paradigms that we believe will be sufficient to satisfy both U.S. and European regulatory authority requirements to begin human clinical testing of products made from hES cells; and

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· The continuous filing and prosecution of patents covering inventions to protect commercialization rights, as well as consummating in-licenses to enable freedom to operate in a variety of fields.

Products under Development

The initial product candidates that we plan to develop from various cell types that we acquired from Geron are summarized in the following table:

Product Candidate
Description
Target Market
Estimated Number of
Potential Patients(1)
Status
AST-OPC1 – Glial
 Cells
Current development focus:
 
 
Spinal Cord Injury
12,000 new cases per year in U.S.
Phase I Trial completed in U.S. 5 Patients treated – no serious adverse events related to the OPC1 drug product to date.
 
Additional potential markets:
 
  
 
Multiple Sclerosis (“MS”)
180,000 new cases per year in U.S.
Proof of principle achieved in animal models.
 
 
 
    
 
Canavan's Disease(2)
Rare
Proof of principle achieved in animal models.
 
 
 
    
 
Stroke
800,000 new cases per year in U.S.
Pre-clinical research.
   
AST-VAC2 –
 Dendritic Cells
Current development focus:
 
    
 
Non-small Cell Lung Cancer
166,000 new cases per year in U.S.
Cells derived and characterization studies performed (parameters analyzed showed normal cell functions in vitro(3)).
Proof of concept established in multiple human in vitro(3) systems. Scalable manufacturing methods under development. 
 
Additional potential markets:
 
 
 
Multiple cancer types
 
  

(1) The estimates of the numbers of potential patients shown in the table are based on data for the United States only and do not include potential patients in other countries.

(2) Canavan's Disease is a congenital neurological degenerative disease in which the growth of the myelin sheath surrounding nerves is inhibited resulting in mental retardation, loss of motor function, abnormal muscle tone, poor head control and enlarged head. Death usually occurs before age 4.

(3) In vitro means in tissue culture dishes.

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Additional product candidates that we may determine to develop from various cell types that we acquired from Geron are summarized in the following table:

Product Candidate
Description
Target Market
Estimated Number of
Potential Patients(1)
Status
AST-VAC1 –
 Autologous Monocyte
 – Derived Dendritic
 Cells (infused cells
derived from the
treated patient)
Cancer
Prostate: 240,000 new cases per year in U.S.
Phase I study in metastatic prostate cancer completed (Journal of Immunology, 2005, 174: 3798-3807).
 
 
Acute myelogenous leukemia: more than 12,000 new cases per year in U.S.
Phase I/II study in acute myelogenous leukemia completed. Manuscript in preparation.
 
 
 
 
CHND1 –
Chondrocytes
Osteoarthritis
25 million total patients in U.S.
Cells derived and partly characterized.
 
 
 
 
 
 
 
Early non-clinical studies have been performed in animal models of osteoarthritis.
 
 
 
 
 
Degenerative Disk Disease
400,000 new spinal fusion cases per year in U.S.
Pre-clinical research.
 
 
 
 
CM1 –
Cardiomyocytes
Heart Failure
6 million total patients in U.S.
Cells derived and characterization studies performed (parameters analyzed showed normal cell functions in vitro).
 
Myocardial Infarction
900,000 new cases per year in U.S.
Proof of concept in three animal models of disease.
 
 
 
Scalable manufacturing established.
 
 
 
First in man clinical trial designed.

(1) The estimates of the numbers of potential patients shown in the table are based on data for the United States only and do not include potential patients in other countries.

Additional Information

We were incorporated in September 2012 under the name BioTime Acquisition Corporation in the state of Delaware. We changed our name to Asterias Biotherapeutics, Inc. in March 2013. Our principal executive offices are located at 230 Constitution Drive, Menlo Park, California 94025. Our telephone number is (650) 433-2900. We currently maintain an Internet website at www.asteriasbiotherapeutics.com.

We are an "emerging growth company," as defined in the Jumpstart Our Business Startups Act of 2012. We will remain an "emerging growth company" until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of our first sale of common equity securities, such as our common stock, pursuant to an effective registration statement under the Securities Act; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the Securities and Exchange Commission (the “SEC”). We refer to the Jumpstart Our Business Startups Act of 2012 herein as the "JOBS Act," and references herein to "emerging growth company" shall have the meaning associated with it in the JOBS Act.

Critical Accounting Policies

Development Stage Company – We comply with the reporting requirements of ASC 915, “Development Stage Entities.”

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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. Royalty revenues consist of royalty payments on sales of products under a license agreement. 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.

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 our acquisition of assets from Geron), in accordance with the accounting rules in ASC 805-50, such intangible assets related to in process research and development (“IPR&D”) are expensed upon acquisition.

Impairment of long-lived assets – Our long-lived assets, including tangible assets, will be 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 will 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 will be recognized and measured by the amount by which the carrying amount exceeds the estimated fair value of the assets.

Results of Operations

Our activities through June 30, 2014 primarily related to the preparation and commencement of our planned research and development operations following the Asset Contribution which consummated on October 1, 2013. Certain other expenses are primarily attributed to rent and utilities, salaries and related expenses, amortization of intangible assets, and general overhead expenses.

For the three and six months ended June 30, 2014, we recorded a net loss of $2,801,757 and $5,088,506, respectively.
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Research and development expenses – Research and development expenses increased by $2,152,872 to $2,742,737 for the three month period ended June 30, 2014 compared to $589,865 for the three months ended June 30, 2013. The increase for the three month period is the result of the ramp-up from our operations following our acquisition of stem cell assets from Geron and BioTime through the Asset Contribution. The increase in research and development expenses is primarily attributable to an increase of $790,388 in employee compensation and related costs, including stock based compensation, allocated to research and development expenses, $725,425 of amortization of the value of Geron’s stem cell assets acquired under the Asset Contribution, an increase of $77,064 in laboratory expenses and supplies, an increase of $216,523 in license and patent fees and patent related litigation fees related primarily to certain patent interference proceedings that we assumed from Geron, an increase of $101,207 in depreciation expenses allocated to research and development expenses, an increase of $91,716 in outside research and service fees, an increase of $42,964 in rent and facilities maintenance related expenses allocated to research and development expenses, and an increase in legal expenses of $47,609. The increase in research and development expenses during the three months ended June 30, 2014 reflects in part a ramp up of work on our AST-OPC1 project following the approval of a grant from the California Institute for Regenerative Medicine (“CIRM”) to fund a portion of that work.

Research and development increased by $4,558,574 to $5,341,883 for the six month period ended June 30, 2014 compared to $783,309 for the six months ended June 30, 2013. The increase is the result of the ramp-up of our operations following our acquisition of stem cell assets from Geron and BioTime through the Asset Contribution and the incurrence of patent and related litigation costs. The increase in research and development expenses is primarily attributable to an increase of $1,578,898 in employee compensation and related costs, including stock based compensation, allocated to research and development expenses, an increase of $1,450,850 of amortization of the value of Geron’s stem cell assets acquired under the Asset Contribution. The increase in employee compensation reflects the hiring of additional management and scientific personnel, and certain executives and other employees who had been employed on a part-time basis during the first half of 2013 becoming employed by us on a full-time basis. Other components of the increase in research and development expenses were: an increase of $234,980 in laboratory expenses and supplies, an increase of $453,698 in license and patent fees and patent related litigation fees related primarily to the certain patent interference proceedings that we assumed from Geron but settled during the quarter, an increase of $271,074 in outside research and service fees, an increase of $206,333 in depreciation expenses allocated to research and development expenses, an increase of $104,945 in scientific consulting expenses, an increase of $65,096 in rent and facilities maintenance related expenses allocated to research and development expenses, an increase of $70,274 in legal expenses, and an increase of $24,907in travel expenses allocated to research and development expenses.

Overall, the increase in research and development expenses relates to costs incurred in setting up our research and product development facility and equipment, initiating our initial product development programs, planning the next phase of clinical trials for our AST-OPC1 and initial clinical trials for our AST-VAC2 product candidates, evaluating other technology that may be available for in-licensing or acquisition, preparing applications for research grants, and initiating discussions with third parties for the manufacture or co-development of product candidates.

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General and administrative expenses – General and administrative expenses increased by $800,256 to $1,544,660 for the three month period ended June 30, 2014 compared to $744,404 for the three months ended June 30, 2013. The increase is the result of the continuation of the ramp-up of our operations following our acquisition of stem cell assets from Geron and BioTime through the Asset Contribution. The increase in general and administrative expenses is primarily attributable to an increase $691,401 in employee compensation, including stock-based compensation, and related costs allocated to general and administrative expenses, arising from the hiring of additional management and administrative personnel, and certain executives and other employees who had been employed on a part-time basis during the first half of 2013 becoming employed by us on a full-time basis. Other components of the increase in general and administrative expenses included: an increase of $164,000 in accounting and tax services, and an increase of $23,201 in general overhead charges allocated to us by BioTime. These increases were offset in part by a decrease of $63,769 in legal expenses.

General and administrative expenses increased by $1,272,784 to $2,639,134 for the six month period ended June 30, 2014 compared to $1,366,350 for the six months ended June 30, 2013. The increase is attributable to the same factors that contributed to the increase of general and administrative expenses during the three months ended June 30, 2014, and includes an increase of $1,103,641 in employee compensation, including stock-based compensation, and related costs allocated to general and administrative expenses, an increase of $211,981 in accounting and tax services, an increase of $145,474 in state corporation and franchise taxes, an increase of $46,951 in rent and facilities maintenance related expenses allocated to general and administrative expenses, an increase of $37,777 in consulting fees, and an increase of $34,202 in general overhead charges allocated to us by BioTime. These increases were offset in part by a decrease of $318,347 in legal expenses.

Income Taxes

A deferred income tax benefit of approximately $2,862,000 was recorded for the six months and ended June 30, 2014, of which approximately $2,442,000 was related to federal and $420,000 was related to state taxes. A deferred income tax benefit of approximately $3,280,000 was recorded for the year ended December 31, 2013, of which approximately $2,800,000 was related to federal and $480,000 was related to state taxes. No tax benefit had been recorded through September 30, 2013 because of the net operating losses incurred and a full valuation allowance had been provided.
 
In June 2014, Asterias’ sale of BioTime shares resulted in a taxable gain of approximately $10.3 million and 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 million deferred tax liability for the temporary taxable difference in the basis of the investment still held by Asterias in BioTime stock.  Both transactions were treated as a deemed distribution by Asterias and recorded against equity.  
 
Liquidity and Capital Resources

At June 30, 2014, we had $12,861,312 of cash and cash equivalents on hand and we held 3,852,880 BioTime common shares, with a market value of approximately $11,751,284 on that date. Subsequent to June 30, 2014, we paid $5,000,000 to BioTime to reimburse BioTime for expenses paid or incurred by BioTime on our behalf prior to our receipt of $12,660,908 in proceeds from the sale of 5,049,197 of our BioTime common shares during June 2014. See “Cash provided by financing activities” below.

We may raise capital from time to time through the sale of the BioTime common shares. We may sell our BioTime common shares, from time to time, by any method that is deemed to be an “at-the-market” equity offering as defined in Rule 415 promulgated under the Securities Act, including sales made directly on or through the NYSE MKT or any other existing trading market for the common shares in the U.S. or to or through a market maker, at prices related to the prevailing market price, or through block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction, or through one more of the foregoing transactions. We expect to sell the BioTime common shares through Cantor Fitzgerald & Co. or such other broker-dealer as BioTime may designate. We may also sell BioTime common shares by any other method permitted by law, including in privately negotiated transactions.
 
We will bear all broker-dealer commissions payable in connection with the sale of the BioTime common shares. Broker-dealers may receive commissions or discounts from us (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated.
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During April 2014 we instituted certain management changes, including the appointment of three new directors and the replacement of our President and Chief Executive Officer. Our management is working to better align our expenditures with available capital resources, and will continue to explore synergistic opportunities at Asterias and BioTime that may advance product development in a cost effective manner. For example, insight that BioTime has gained from its PureStem® technology might help us improve the purity and efficiency of production of the hES derived progenitor cells that we may use in some of our product development programs. We are continuing to evaluate the opportunities for our stem cell assets in order to select the best paths for the advancement of our key product programs, including paths that can be followed with our current financial assets and those that would be open if we obtain the funding we are seeking in the form of research grants, cooperative development arrangements, and new equity capital.
 
We expect that as a result of this review of our programs there will be a more focused allocation of capital to programs that receive third party funding or other support, and a reduced level of current expenditures on other programs. If third party funding or support is not received, we would expect to concentrate our resources on those product development programs that provide the best opportunity for near-term progress.
 
We have outstanding warrants to purchase 3,500,000 of our Series B Shares at an exercise price of $5 per share that will expire on September 30, 2016, and warrants to purchase 5,000,000 of our Series B Shares at an exercise price of $2.34 per share that will expire on June 15, 2015. We will receive $29,200,000 if all of the warrants are exercised. There can be no assurance that the warrants will be exercised.

We plan to use the cash we have available to develop certain of our product candidates and technology, to acquire new stem cell products and technology through licenses or similar agreements from other companies, and to defray overhead expenses and to pay general and administrative expenses. We may also use available funds for any clinical trials of products that we may conduct. We expect to continue to incur operating losses and negative cash flows. BioTime contributed to the funding of our business activities from inception through June 30, 2014 but is not expected to do so in the future.

We may need to raise additional capital from time to time to pay operating expenses. We may raise additional capital through the issue and sale of shares of our common stock or preferred stock or other securities and through the sale of the BioTime common shares we hold. The prices at which we may issue and sell our securities and our BioTime common shares in the future are not presently determinable and will depend upon many factors, including prevailing prices for those securities in the public market.

We have been awarded a $14.3 million Strategic Partnership III grant by CIRM to help fund our clinical development of AST-OPC1. The grant will provide funding for us 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. We are 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 us and CIRM, and our continued progress to achieve certain pre-defined project milestones. We are in the process of negotiating with CIRM the funding agreement for our award, including the schedule for disbursement of the awarded funds and the pre-defined project milestones for continued funding. Our ability to initiate the Phase 1/2a trial of AST-OPC1 on schedule will be dependent on our timely completion of these negotiations, and our ability to achieve adequate funds disbursements from CIRM during the early period of the award.

We have passed the scientific review stage and have reached agreement in principle on the funding agreement for a grant from a large United Kingdom based charitable organization to fund Phase I/IIa clinical development of our 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 our partner. Our partner 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. We anticipate that we will complete our negotiations and execute 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.

There can be no assurance that we will receive any of the grants that we are seeking.

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 could result in the dilution of the interests of our shareholders.

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Cash provided by/(used in) operations

Since our inception, we have incurred losses from operations and negative cash flows from our operations. During the six months ended June 30, 2014, our total research and development expenditures were $5,341,883 and our general and administrative expenditures were $2,639,134. Net loss for the six months ended June 30, 2014 amounted to $5,088,506. We received $82,693 of cash during this period from royalty revenues on product sales by licensees. As of June 30, 2014 and December 31, 2013, we had a working capital surplus of $18,936,444 and $31,835,965, respectively, and an accumulated deficit of $28,227,143 and $23,138,637, respectively, based on our operating losses and the expensed IPR&D.

Net cash used in operating activities during this period amounted to $1,933,988. The difference between the net loss and net cash used in operating activities during the six months ended June 30, 2014 was primarily attributable to $3,369,418 of our expenses paid by BioTime which is included in “amount due to BioTime” on our June 30, 2014 balance sheet, amortization of $1,450,851 in intangible assets, $1,004,844 in stock-based compensation paid to employees, consultants and directors, $269,110 in depreciation expenses, $178,953 in accrued expenses, and $56,773 in prepaid expenses and other current assets. This overall difference was offset to some extent by $2,862,284 in deferred income tax benefits, and $313,147 in accounts payable.

Investing and financing activities

During the six months ended June 30, 2014, we used $198,161 in cash to purchase equipment and furniture, and paid $306,560 as security deposits for our leased facilities. During June 2014, we received $12,660,908 in proceeds from the sale of 5,049,197 our BioTime common shares, including 49,197 shares sold in open market transactions and 5,000,000 shares sold with warrants to purchase 5,000,000 Asterias Series B Shares to two investors for $12,500,000 in cash. The exercise price of the warrants is $2.34. The exercise price and the number of shares of Asterias common stock issuable upon the exercise of the warrants are subject to adjustment in the event of a stock split, stock dividend, combination of shares, recapitalization or certain other transactions. The warrants will expire on June 15, 2015 if not exercised by that date.

During June 2014, we also received $468,000 from the sale of 200,000 of our Series B shares to our newly appointed President and Chief Executive Officer for $2.34 per share.

Off-Balance Sheet Arrangements

As of June 30, 2014, and as of December 31, 2013, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Exchange Risk

We are not presently exposed in a significant degree to foreign exchange currency risks because we are not conducting international business at this time, and we do not engage in foreign currency hedging activities. If we engage in international transactions, we will need to translate foreign currencies into U.S. dollars for reporting purposes, and currency fluctuations could have an impact on our financial results.

Credit Risk

We place some of our cash in U.S. banks and we invest the balance of our cash in money market funds. Deposits with banks may temporarily exceed the amount of insurance provided on such deposits. We will monitor the cash balances in the accounts and adjust the cash balances as appropriate, but if the amount of a deposit at any time exceeds the federally insured amount at a bank, the uninsured portion of the deposit could be lost, in whole or in part, if the bank were to fail. Our investments in money market funds are not insured or guaranteed by the United States government or any of its agencies.

Interest Rate Risk

We invest most of our cash in money market funds. The primary objective of our investments will be to preserve principal and liquidity while earning a return on our invested capital, without incurring significant risks. Our future investment income is not guaranteed and may fall short of expectations due to changes in prevailing interest rates, or we may suffer losses in principal if the net asset value of a money market fund falls below $1 per share.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

It is management’s responsibility to establish and maintain adequate internal control over all financial reporting pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”). Our management, including our principal executive officer, principal operations officer, and principal financial officer, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of a date within ninety (90) days of the filing date of this Quarterly Report on Form 10-Q. Following this review and evaluation, management collectively determined that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to management, including our chief executive officer, chief operations officer, and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, we may be involved in routine litigation incidental to the conduct of our business. We are not presently involved in any other material litigation or proceedings, and to our knowledge no such litigation or proceedings are contemplated.

During May 2014, we entered into a settlement agreement with ViaCyte, Inc. (“ViaCyte”) concerning certain litigation in the United States District Court for the Northern District of California (Civil Action No. C12-04813) seeking the reversal of two adverse determinations by the United States Patent and Trademark Office with respect to two patent applications in U.S. Patent Interference 105,734, involving U.S. patent 7,510,876 (ViaCyte) and U.S. patent application 11/960,477 (Geron), and U.S. Patent Interference 105,827 involving U.S. patent 7,510,876 (ViaCyte) and U.S. patent application 12/543,875 (Geron), along with four Opposition Proceedings pending before the Australian Patent Office pertaining to priority rights and the validity of each party’s patents relating to endodermal precursor cells. Under the terms of the settlement agreement, the parties granted to each other a royalty free, fully paid license to each other’s technology relating to endoderm lineage cells including definitive endoderm and gut endoderm cells, only to the extent necessary to allow the licensee to make, use, sell, offer for sale, or import endodermal lineage cells. The Asterias patents that were licensed to ViaCyte in the settlement include US Patent Application No 11/161,633. The ViaCyte patents that were licensed to us in the settlement included US Patent Application Nos. 11/021,618, 11/093,590, 10/584,338, 11/165,305, 11/317,387, and 11/860,494.

Item 1A. Risk Factors

Our business is subject to various risks, including those described below. You should consider the following risk factors, together with all of the other information included in this report and the risks described in our Annual Report on Form 10-K for the year ended December 31, 2013, which could materially adversely affect our proposed operations, business prospects, and financial condition, and the value of an investment in our business. There may be other factors that are not mentioned here or of which we are not presently aware that could also affect our business operations and prospects.

We have a history of operating losses and negative cash flows

Since our inception in September 2012, we have incurred operating losses and negative cash flow, and we expect to continue to incur losses and negative cash flow in the future. Our net losses for the six months ended June 30, 2014, for the fiscal year ended December 31, 2013, and for the period from September 2012 (inception) to June 30, 2014 were $5,088,506, $22,379,744, and $28,227,143, respectively, and we had an accumulated deficit of $28,227,143 at June 30, 2014 and $23,138,637 at December 31, 2013. Our net loss for the year ended December 31, 2013 and our accumulated deficit as of that date include $17,458,766 charged as in-process research and development expenses (“IPR&D”) in accordance with Accounting Standards Codification (“ASC”) 805-50 on account of our acquisition of certain assets from Geron. See Notes 2 and 3 to Interim Condensed Financial Statements. BioTime previously funded our formation and operating costs but we do not expect BioTime to continue to do so in the future. We have limited cash resources and will depend upon future equity financings, research grants, financings through collaborations with third parties, and sales of BioTime common shares that we own as a source of funding for our operations. There is no assurance that we will be able to obtain the financing we need from any of those sources, or that any such financing that may become available will be on terms that are favorable to us and our shareholders.

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The condition of certain cells, cell lines and other biological materials that we acquired from Geron could impact the time and cost of commencing our research and product development programs

The cells, cell lines and other biological materials that we acquired are being stored under cryopreservation protocols intended to preserve their functionality. We have successfully completed the verification of the viability of three lots of OPC1 cells that we intend to use in clinical trials. However, the functional condition of the other materials cannot be certified until they are tested in an appropriate laboratory setting by qualified scientific personnel using validated equipment. We intend to perform that testing on the cells that we intend to use in our research and development programs as the need arises.

To the extent that the cells we plan to use are not sufficiently functional for our purposes, we would need to incur the time and expense of regenerating cell lines from cell banks, or regenerating cell banks from cell stocks, which could delay and increase the cost of our research and development work using those cells.

We have assumed certain obligations and potential liabilities with regard to clinical trials conducted by Geron, and we do not yet know the scope of any resulting expense

We have assumed Geron’s obligations to obtain information and prepare reports about the health of patients who participated in clinical trials of Geron’s GRNOPC1 cell replacement therapy for spinal cord damage and its GRNVAC1 immunological therapy for certain cancers. Although the future cost of patient health information gathering and reporting is not presently determinable, we do not expect that the cost will be material to our financial condition.

We have also assumed any liabilities to those patients that might arise as result of any injuries they may have incurred as a result of their participation in the clinical trials. We are not aware of any claims by patients alleging injuries suffered as a result of the Geron clinical trials, but if any claims are made and if liability can be established, the amount of any liability that we may incur, depending upon the nature and extent of any provable injuries incurred, could exceed any insurance coverage we may obtain and the amount of the liability could be material to our financial condition.

Our business could be adversely affected if we lose the services of the key personnel upon whom we depend

Our stem cell research program will be directed primarily by our President and Chief Executive Officer Pedro Lichtinger and by our President of Research and Development, Dr. Jane S. Lebkowski. The loss of the services of Mr. Lichtinger or Dr. Lebkowski could have a material adverse effect on us.

A majority of our directors are directors or officers of BioTime

Three of the six members of our Board of Directors are also directors of BioTime, three are officers of BioTime, and a fourth director is an employee of the investment manager of the largest shareholder of BioTime. Some of our directors also serve on the Boards of Directors of one or more of BioTime’s other subsidiaries. The relationship of our directors with BioTime means that we will not have a Board of Directors making business decisions on our behalf independent from BioTime. Even those of our directors who do not serve on the BioTime Board of Directors will be elected to our Board of Directors by BioTime, and they may be removed from our Board by BioTime, as the majority shareholder.

You may experience dilution of your ownership interests because of the future issuance of additional shares of our common stock and our preferred stock

In the future, we may issue our authorized but previously unissued equity securities, resulting in the dilution of the ownership interests of our present shareholders. We are currently authorized to issue an aggregate of 150,000,000 shares of common stock, consisting of 75,000,000 Series A Shares and 75,000,000 Series B Shares. We are also authorized to issue 5,000,000 shares of “blank check” preferred stock. As of August 5, 2014, we had issued and outstanding 6,537,779 Series A Shares and 24,361,040 Series B Shares. We have also reserved 8,500,000 Series B Shares for issuance upon the exercise of the warrants, and 4,500,000 Series B Shares for issuance under a stock option and stock purchase plan. The Series B Shares will be convertible into Series A Shares after the completion of the Series A Distribution and the BioTime Warrants Distribution.

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We may issue additional Series A Shares, Series B Shares, or other securities in order to raise additional capital, or in connection with hiring or retaining employees or consultants, or in connection with future acquisitions of licenses to technology or rights to acquire products, in connection with future business acquisitions, or for other business purposes. The future issuance of any such additional shares of common stock or other securities may create downward pressure on the trading price of our common stock.

We may also issue 5,000,000 shares of preferred stock having rights, preferences, and privileges senior to the rights of our common stock with respect to dividends, rights to share in distributions of our assets if we liquidate our company, or voting rights. Any preferred stock may also be convertible into Series A Shares or Series B Shares on terms that would be dilutive to holders of common stock.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Previously reported.

Item 3.
 Default Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information.

None.

Item 6. Exhibits
 
Exhibit Numbers Description

3.1
Amended and Restated Certificate of Incorporation (1)
 
 
3.2
Bylaws, as amended (2)
 
 
4.1
Warrant Agreement, dated June 16, 2014, by Asterias Biotherapeutics, Inc. for the benefit of certain warrant holders (3)
 
 
4.2
Form of Warrant (included in Exhibit 4.1) (3)
 
 
10.1
Employment Agreement, dated as of June 9, 2014, between Pedro Lichtinger and Asterias Biotherapeutics, Inc. (3)
 
 
10.2
Stock Purchase Agreement, dated June 12, 2014, between Pedro Lichtinger and Asterias Biotherapeutics, Inc. (3)
 
 
10.3
Purchase Agreement, dated June 13, 2014, between Broadwood Partners, L.P. and Asterias Biotherapeutics, Inc. (3)
 
 
10.4
Purchase Agreement, dated June 13, 2014, between The George Karfunkel 2007 Grantor Trust #1 and Asterias Biotherapeutics, Inc. (3)
 
 
10.5
Registration Rights Agreement, dated June 16, 2014, between The George Karfunkel 2007 Grantor Trust #1, Broadwood Partners, L.P., and Asterias Biotherapeutics, Inc. (3)
 
 
31
Rule 13a-14(a)/15d-14(a) Certification.*
 
 
32
Section 1350 Certification.*
 
 
101
Interactive Data File
 
 
101.INS
XBRL Instance Document *
 
 
101.SCH
XBRL Taxonomy Extension Schema *
 
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101.CAL
XBRL Taxonomy Extension Calculation Linkbase *
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase *
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase *
 
 
101.DEF
XBRL Taxonomy Extension Definition Document *
 
(1) Incorporated by reference to Registration Statement on Form S-1 (333-187706) filed with the Securities and Exchange Commission on April 3, 2013.

(2) Incorporated by reference to Post-Effective Amendment No. 3 to Registration Statement on Form S-1 (333-187706) filed with the Securities and Exchange Commission on April 17, 2014.

(3) Incorporated by reference to Post-Effective Amendment No. 4 to Registration Statement on Form S-1 (333-187706) filed with the Securities and Exchange Commission on June 19, 2014.

* Filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
ASTERIAS BIOTHERAPEUTICS, INC.
 
 
 
 
Date: August 11, 2014
/s/ Pedro Lichtinger
 
 
Pedro Lichtinger
 
 
Chief Executive Officer
 

Date: August 11, 2014
/s/ Robert W. Peabody
 
 
Robert W. Peabody
 
 
Chief Financial Officer
 

Exhibit
Number
Description
 
 
3.1
Amended and Restated Certificate of Incorporation (1)
 
 
3.2
Bylaws, as amended (2)
 
 
4.1
Warrant Agreement, dated June 16, 2014, by Asterias Biotherapeutics, Inc. for the benefit of certain warrant holders (3)
 
 
4.2
Form of Warrant (included in Exhibit 4.1) (3)
 
 
10.1
Employment Agreement, dated as of June 9, 2014, between Pedro Lichtinger and Asterias Biotherapeutics, Inc. (3)
 
 
10.2
Stock Purchase Agreement, dated June 12, 2014, between Pedro Lichtinger and Asterias Biotherapeutics, Inc. (3)
 
 
10.3
Purchase Agreement, dated June 13, 2014, between Broadwood Partners, L.P. and Asterias Biotherapeutics, Inc. (3)
 
 
10.4
Purchase Agreement, dated June 13, 2014, between The George Karfunkel 2007 Grantor Trust #1 and Asterias Biotherapeutics, Inc. (3)
 
 
10.5
Registration Rights Agreement, dated June 16, 2014, between The George Karfunkel 2007 Grantor Trust #1, Broadwood Partners, L.P., and Asterias Biotherapeutics, Inc. (3)
 
 
Rule 13a-14(a)/15d-14(a) Certification.*
 
 
Section 1350 Certification.*
 
 
101
Interactive Data File
 
 
101.INS
XBRL Instance Document *
 
 
101.SCH
XBRL Taxonomy Extension Schema *
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase *
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase *
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase *
 
 
101.DEF
XBRL Taxonomy Extension Definition Document *

(1) Incorporated by reference to Registration Statement on Form S-1 (333-187706) filed with the Securities and Exchange Commission on April 3, 2013.

(2) Incorporated by reference to Post-Effective Amendment No. 3 to Registration Statement on Form S-1 (333-187706) filed with the Securities and Exchange Commission on April 17, 2014.

(3) Incorporated by reference to Post-Effective Amendment No. 4 to Registration Statement on Form S-1 (333-187706) filed with the Securities and Exchange Commission on June 19, 2014.

* Filed herewith.
 
 
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