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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 September 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 001-36646

Asterias Biotherapeutics, Inc.

(Exact name of registrant as specified in its charter)

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.

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: 30,902,152 shares of Series A common stock, $0.0001 par value, as of November 7, 2014.

 

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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.

 

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ASTERIAS BIOTHERAPEUTICS, INC.

(a company in the development stage)

CONDENSED BALANCE SHEETS

See accompanying notes to the condensed interim financial statements.

 

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ASTERIAS BIOTHERAPEUTICS, INC.

(a company in the development stage)

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(UNAUDITED)

		Three Months Ended September 30,								Nine Months Ended September 30,								Period from Inception (September 24, 2012)
		2014				2013				2014				2013				to September 30, 2014
REVENUE
Royalties from product sales		$	84,515			$	-			$	167,207			$	-			$	167,207
Cost of sales			(42,258	)			-				(83,603	)			-				(83,603	)
Total gross profit			42,257				-				83,604				-				83,604
EXPENSES
Research and development			(2,568,214	)			(1,149,059	)			(7,910,097	)			(1,931,048	)			(12,229,592	)
Acquired in-process research and development			-				-				-				-				(17,458,766	)
General and administrative			(1,468,754	)			(1,523,732	)			(4,107,888	)			(2,888,028	)			(8,749,636	)
Total operating expenses			(4,036,968	)			(2,672,791	)			(12,017,985	)			(4,819,076	)			(38,437,994	)
Loss from operations			(3,994,711	)			(2,672,791	)			(11,934,381	)			(4,819,076	)			(38,354,390	)
OTHER INCOME/(EXPENSE)
Interest expense, net			(291	)			-				(9,827	)			-				(11,564	)
Gain on sale of fixed assets			-				2,430				-				2,430				2,430
Other income (expense), net			26				1,833				(1,559	)			1,924				(1,575	)
Total other income (expense), net			(265	)			4,263				(11,386	)			4,354				(10,709	)
LOSS BEFORE DEFERRED INCOME TAX BENEFIT			(3,994,976	)			(2,668,528	)			(11,945,767	)			(4,814,722	)			(38,365,099	)
Deferred income tax benefit			2,312,693				-				5,174,977				-				8,455,672
NET LOSS			(1,682,283	)			(2,668,528	)			(6,770,790	)			(4,814,722	)			(29,909,427	)
Unrealized gain (loss) on available-for-sale securities, net			345,549				-				(108,829	)			-				(3,043,515	)
COMPREHENSIVE LOSS		$	(1,336,734	)		$	(2,668,528	)		$	(6,879,619	)		$	(4,814,722	)		$	(32,952,942	)
Basic and diluted net loss per common share		$	(0.05	)		$	(51.62	)		$	(0.22	)		$	(93.13	)
Weighted average shares of common stock outstanding — basic and diluted			30,898,819				51,700				30,659,259				51,700

 

See accompanying notes to the condensed interim financial statements.

 

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ASTERIAS BIOTHERAPEUTICS, INC.

(a company in the development stage)

CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

See accompanying notes to the condensed interim financial statements.

 

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(a company in the development stage)

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 nine months ended September 30, 2014 as such revenue is not considered significant as defined in 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 September 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 common stock throughout the periods presented. BioTime owns 70.6% of the outstanding shares of Asterias common stock at September 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 employee devotes 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.

 

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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. The warrants issued to BioTime are now exercisable for shares of Series A common stock, par value $0.0001 per share (“Series A Shares”) as the outstanding Series B Shares were converted into Series A Shares in October 2014. See Note 12. 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:

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.

 

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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 Series A Shares, which Geron 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 was also obligated to distribute to the holders of its Series A Shares the 8,000,000 BioTime Warrants contributed to Asterias by BioTime. Geron gave notice to Asterias that the Series A Distribution was completed on August 15, 2014. On October 1, 2014 the distribution of the BioTime Warrants to the new holders of Series A Shares was completed and on October 3, 2014 Asterias’ Series B Shares were converted to Series A shares. See Note 12.

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:

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.

 

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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. Following the conversion of the Series B Shares into Series A Shares on October 3, 2014, such warrants are now exercisable into Series A Shares. See Note 12. On October 1, 2013, the shares and warrants were issued in exchange for $5,000,000 in cash.

 

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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 September 30, 2014, the unaudited interim condensed statements of operations and comprehensive loss for the three and nine months ended September 30, 2014 and 2013, and the period from inception (September 24, 2012) to September 30, 2014, and the unaudited interim condensed statements of cash flows for the nine months ended September 30, 2014 and 2013, and the period from inception (September 24, 2012) to September 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 presented herein. The results of operations for the nine months ended September 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 materially from those estimates.

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.

 

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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 September 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.

 

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 continue to file its own U.S. federal tax return including its activity for the entire 2014 calendar year. For California purposes their activity will continue to be included in BioTime’s California combined tax return. Prior to the period ended December 31, 2013, Asterias’ operations through September 30, 2013 were included in BioTime’s consolidated U.S. federal income tax return. For the period from October 1, 2013 through December 31, 2013 Asterias filed a separate U.S federal tax return. For California, Asterias’ activity for the entire 2013 calendar year was included in BioTime’s combined tax return. 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 September 30, 2014 and December 31, 2013. Management is currently unaware of any tax issues under review.

 

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A deferred income tax benefit of approximately $5,175,000 was recorded for the nine months ended September 30, 2014, of which approximately $3,580,000 was related to federal and $1,595,000 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 $3.6 million. Asterias received the BioTime shares from BioTime as part of their consideration under the Asset Contribution Agreement, a tax free transaction. See Note 2. This payable, however, is expected to be fully offset by available net operating losses thus, resulting in no cash income taxes due from that sale. As of September 30, 2014, Asterias recorded a $4.1 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.

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

·

Level 2– Observable 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 3– Unobservable 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 2 inputs.

 

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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:

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:

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. 2014-09 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 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.

In August 2014, the FASB issued ASU No. 2014-15 “Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” requiring management to evaluate on a regular basis whether any conditions or events have arisen that could raise substantial doubt about the entity’s ability to continue as a going concern. The guidance 1) provides a definition for the term “substantial doubt,” 2) requires an evaluation every reporting period, interim periods included, 3) provides principles for considering the mitigating effect of management’s plans to alleviate the substantial doubt, 4) requires certain disclosures if the substantial doubt is alleviated as a result of management’s plans, 5) requires an express statement, as well as other disclosures, if the substantial doubt is not alleviated, and 6) requires an assessment period of one year from the date the financial statements are issued. The standard is effective for our reporting year ending December 31, 2016, and interim periods thereafter. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our financial statements.

4.	Balance Sheet Components

Equipment and Furniture, Net

At September 30, 2014 and December 31, 2013, equipment and furniture were comprised of the following:

Depreciation expense amounted to $408,613 and $95,244 for the nine months ended September 30, 2014 and 2013, respectively.

5.	Investment in BioTime and in BioTime Subsidiaries

Investment in BioTime

At September 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.
 

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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. Following the conversion of the Series B Shares into Series A Shares on October 3, 2014, such warrants are now exercisable into Series A Shares. See Note 12. 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 under U.S. GAAP. 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 September 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 $3,043,515 in accumulated other comprehensive loss, which is attributed to an unrealized loss on the remaining 3,852,880 BioTime common shares held by Asterias on September 30, 2014. At December 31, 2013, Asterias has recorded an unrealized net loss of $2,934,686 in accumulated other comprehensive loss, which is attributed to an unrealized loss on the 8,902,077 BioTime common shares then held by Asterias.

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 September 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 agreed to distribute the BioTime Warrants to holders of its Series A Shares (the “BioTime Warrants Distribution”) 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. During August 2014, Geron gave notice to Asterias that the Series A Distribution has been completed and on October 1, 2014, Asterias completed the BioTime Warrants Distribution. See Note 12.

 

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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 September 30, 2014 was $7,572,089, based on a $5.00 exercise price, a $3.14 closing price on September 30, 2014, a four year term, 54.875% volatility, and a 1.4% 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 September 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 September 30, 2014 and December 31, 2013 is shown in the following table:

 

Amortization of currently held intangible assets for periods subsequent to September 30, 2014 is estimated as follows:

 

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Common Stock Issuance

In June 2014, Asterias sold 200,000 Series B Shares at $2.34 per share for $468,000 to Pedro Lichtinger, its President and Chief Executive Officer.

Accounting for Asterias Warrants

At September 30, 2014, Asterias had outstanding warrants to purchase 8,500,000 of its Series B Shares. The warrants became exercisable for Series A Shares on October 3, 2014 when the outstanding Series B Shares were converted into Series A 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

In 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.

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.
 

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Options Granted

As of September 30, 2014, Asterias had granted to certain officers, employees, and directors, options to purchase a total of 3,119,999 Series B Shares at exercise price of $2.34 per share. As of October 3, 2014, the options are exercisable for Series A Shares as a result of the conversion of the outstanding Series B Shares into Series A Shares. The following table summarizes stock option activity during the nine months ended September 30, 2014:

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:

 

		September 30 2014 (Unaudited)
Risk-free interest rate		0.42 -	1.340%
Dividend yield		-
Volatility		69.37 -	84.05%
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.

Total proceeds if all options granted and outstanding as of September 30, 2014 were exercised would be $7,300,798.

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 nine months ended September 30, 2014 and 2013, respectively, include stock-based compensation as follows:

 

 

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10.	Commitments and Contingencies

Asterias has commitments consisting of an operating lab equipment lease, a sublease of its current office and research facility, a lease of its satellite office in New York, and a lease for its future office and research facility.

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

 

See also Note 12.

 

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.

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.

 

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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 $108,926 and $38,894 of general overhead expenses as well as $23,731 and $0 of research and development overhead to Asterias during the nine months ended September 30, 2014 and 2013, respectively. In addition, BioTime allocated $248,036 and $166,106 of salaries and related charges to general and administrative expenses, and $13,260 and $13,381 of salaries and related charges to research and development expenses, during the nine months ended September 30, 2014 and 2013, respectively.

 

13.	Subsequent Events

On October 1, 2014, Asterias completed the BioTime Warrants Distribution by distributing 8,000,000 BioTime Warrants on a pro rata basis to the holders of Asterias Series A common stock.

On October 3, 2014, the outstanding Series B Shares were converted into Series A Shares at the rate of one Series A Share for each Series B Share.

On October 8, 2014, Asterias’ Series A Shares began trading on the NYSE MKT under the ticker symbol “AST”.

On October 16, 2014 Asterias signed a Notice of Grant Award (“NGA”) with the California Institute of Regenerative Medicine (“CIRM”), effective October 1, 2014, with respect to a $14.3 million CIRM grant award for clinical development of Asterias’ product, AST-OPC1. The NGA includes the terms under which CIRM will release grant funds to Asterias. Asterias received the first payment  from CIRM in the amount of $916,554 during October 2014.

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 nine months ended September 30, 2014 and 2013 and for the period from September 24, 2012 (our date of inception) to September 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 nine months ended September 30, 2014 as compared to the three and nine months ended September 30, 2013. This discussion should be read in conjunction with our Condensed Consolidated Financial Statements for the three and nine months ended September 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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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:

(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)	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:

(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.

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Critical Accounting Policies

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

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.

 

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The following tables show on a comparative basis the amounts of our research and development and general and administrative expenses for the three and nine month periods ended September 30, 2014 and 2013.

 

 

Research and development expenses – Our total research and development expenses for the three and nine months ended September 30, 2014 amounted to $2,568,214 and $7,910,097, respectively, compared to $1,149,059 and $1,931,048 in the same periods in 2013, respectively.

The increase in research and development expenses by $1,419,155 to $2,568,214 for the three month period ended September 30, 2014 compared to $1,149,059 for the three months ended September 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 on October 1, 2013 and approval of a $14.3 million grant from the California Institute for Regenerative Medicine (“CIRM”) during May 2014 to fund a portion of our AST-OPC1 development work. The increase in research and development expenses primarily reflects an increase of $444,889 in employee compensation and related costs, including stock-based compensation, allocated to research and development expenses, and $725,425 of amortization of the value of stem cell assets acquired from Geron. 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 in Q3 2013 becoming employed by us on a full-time basis. Other components of the increase in research and development expenses were: an increase of $194,921 in license and patent fees that we assumed from Geron and settled during May 2014, an increase of $70,457 in depreciation expenses allocated to research and development expenses, and an increase of $57,428 in contract manufacturing expenses.

Research and development increased by $5,979,049 to $7,910,097 for the nine month period ended September 30, 2014 compared to $1,931,048 for the nine months ended September 30, 2013. The increase is the result of substantially the same factors that led to an increase in research and development expenses for the three months ended September 30, 2014. The increase in research and development expenses primarily reflects an increase of $2,014,261 in employee compensation and related costs, including stock-based compensation, allocated to research and development expenses, and an increase of $2,176,276 of amortization of the value of stem cell assets acquired from Geron. 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 $718,892 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 May 2014, an increase of $307,183 in outside research and service fees, an increase of $276,798 in depreciation expenses allocated to research and development expenses, an increase of $185,243 in laboratory expenses and supplies, an increase of $72,890 in rent and facilities maintenance related expenses allocated to research and development expenses, an increase of $71,444 in contract manufacturing related expenses, an increase of $43,698 in travel, meals and lodging expenses allocated to research and development expenses.

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General and administrative expenses – General and administrative expenses decreased by $54,978 to $1,468,754 for the three month period ended September 30, 2014 compared to $1,523,732 for the three months ended September 30, 2013. The decrease reflects in part certain non-recurring costs incurred during the third quarter of 2013 relating to our acquisition of assets from Geron and BioTime. The decrease in general and administrative expenses is primarily attributable to a decrease of $110,556 in legal expenses, a decrease of $67,000 in accounting, audit, and tax services, a decrease of $44,260 in stock-based compensation to directors, and a decrease of $142,738 in employee stock-based compensation allocated to general and administrative expenses, which is offset by an increase of $103,465 in salaries and payroll related costs allocated to general and administrative expenses, an increase of $94,981 in investor and public relations related expenses, stock listing and filing fees, an increase of $56,869 in rent, utilities and facilities maintenance related expenses allocated to general and administrative expenses, and $40,594 in state corporation and franchise taxes.

General and administrative expenses increased by $1,219,860 to $4,107,888 for the nine month period ended September 30, 2014 compared to $2,888,028 for the nine months ended September 30, 2013. The increase of general and administrative expenses during the nine months ended September 30, 2014 is primarily comprised of an increase of $1,018,448 in employee compensation, including stock-based compensation, and related costs allocated to general and administrative expenses, an increase of $184,963 in state corporate and franchise taxes, an increase of $144,981 in accounting and tax services, an increase of $107,669 in investor and public relat5ions related expenses, stock listing and filing fees, an increase of $83,395 in rent and facilities maintenance expense, and an increase of $55,056 in general consulting expenses. These increases were offset in part by a decrease of $428,903 in legal expenses.

Income Taxes

A deferred income tax benefit of approximately $5,175,000 was recorded for the nine months ended September 30, 2014, of which approximately $3,580,000 was related to federal and $1,595,000 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 $3.6 million. This payable, however, is expected to be fully offset by available net operating losses thus, resulting in no cash income taxes due from that sale. As of September 30, 2014, Asterias recorded a $4.1 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 September 30, 2014, we had $5,025,499 of cash and cash equivalents on hand and we held 3,852,880 BioTime common shares, with a market value of approximately $12,100,043 on that date. We received $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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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 conduct a Phase 1/2a clinical trial of AST-OPC1 in subjects with complete cervical 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. On August 21, 2014, we received notice from the FDA of clearance to initiate a Phase 1/2a clinical trial of our product, AST-OPC1, in patients with complete cervical spinal cord injury. The approved trial follows the successful completion of the Phase 1 clinical study of the product, and is designed to assess safety and activity of escalating doses of AST-OPC1 in patients with complete cervical spinal cord injuries, the first targeted indication for AST-OPC1. On October 16, 2014, we signed the Notice of Grant Award with CIRM, effective October 1, 2014. The NGA provides for the immediate release of Clinical Development payments and the release of additional grant funds pursuant to the previously announced $14.3 million CIRM grant award for clinical development of Asterias’ product, AST-OPC1. CIRM will disburse the grant funds to us over four years in accordance with a quarterly disbursement schedule, subject to our attainment of certain progress and safety milestones. Asterias received the first payment  from CIRM during October 2014 in the amount of $916,554.

During September 2014, we entered into a Clinical Trial and Option Agreement (the “CRUK Agreement”) with Cancer Research UK (the “Charity”) and Cancer Research Technology Limited, (“CRT”), a wholly-owned subsidiary of the Charity, pursuant to which the Charity has agreed to fund Phase I/IIa clinical development of our AST-VAC2 product candidate. We will, at our own cost, complete process development and manufacturing scale-up of the AST-VAC2 manufacturing process and will transfer the resulting cGMP-compatible process to the Charity. The Charity will, at its own cost, manufacture clinical grade AST-VAC2 and will carry out the Phase I/IIa clinical trial of AST-VAC2 in cancer patients both resected early-stage and advanced forms of lung cancer. We will have an exclusive first option to obtain a license to use the data from the clinical trial. If we exercise that option we will be obligated to make payments upon the execution of the License Agreement, upon the achievement of various milestones, and then royalties on sales of products. In connection with the CRUK Agreement, we sublicensed to CRUK for use in the clinical trials and product manufacturing process certain patents that have been licensed or sublicensed to us by third parties. We would also be obligated to make payments to those licensors and sublicensors upon the achievement of various milestones, and then royalties on sales of products if AST-VAC2 is successfully developed and commercialized.

We have outstanding warrants to purchase 3,500,000 of our Series A 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 A 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, including our planned clinical trial of AST-OPC1, to acquire new stem cell products and technology through licenses or similar agreements from other companies, and to pay general and administrative expenses. We expect to continue to incur operating losses and negative cash flows. BioTime contributed to the funding of our business activities from inception through September 30, 2014 but is not expected to do so in the future.

We will 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.

As the distributions of the CIRM grant are subject to meeting certain progress and go/no-go milestones, there can be no assurance that we will receive the entire amount granted.

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 nine months ended September 30, 2014, our total research and development expenditures were $7,910,097 and our general and administrative expenditures were $4,107,888. Net loss for the nine months ended September 30, 2014 amounted to $6,770,790. We received $167,207 of cash during this period from royalty revenues on product sales by licensees. As of September 30, 2014 and December 31, 2013, we had a working capital surplus of $16,545,202 and $31,835,965, respectively, and an accumulated deficit of $29,909,427 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 $9,767,709. The difference between the net loss and net cash used in operating activities during the nine month ended September 30, 2014 was primarily attributable to amortization of intangible assets of $2,176,276, stock-based compensation paid to employees of $1,400,193, depreciation expense of $408,613, and accrued liabilities of $44,515. The overall difference was offset to some extent by $1,658,053 of our expenses paid by BioTime which is reflected in “amount due to BioTime” on our September 30, 2014 Condensed Statements of Cash Flows, accounts payable of $181,076, and by deferred income tax benefits of $5,174,977.

Investing and financing activities

During the nine months ended September 30, 2014, we used $200,253 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 A 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.

In 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 September 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.

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.

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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

Our management, including our principal executive officer and principal financial officer, have reviewed and evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Following this review and evaluation, the principal executive officer and principal financial officer 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 principal executive officer, and principal 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.

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 nine months ended September 30, 2014, for the fiscal year ended December 31, 2013, and for the period from September 2012 (inception) to September 30, 2014 were $6,770,790, $22,379,744, and $29,909,427, respectively, and we had an accumulated deficit of $29,909,427 at September 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.

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. 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.-

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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.

BioTime owns a majority of our common stock and can elect all of our directors

Because BioTime owns a majority of the outstanding Series A Shares, it has the voting power to elect our entire Board of Directors. Presently, four of the eight members of our Board of Directors are also directors or officers of BioTime, and a fifth 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 November 10, 2014, we had issued and outstanding 30,902,152 Series A Shares. We have also reserved 8,500,000 Series A Shares for issuance upon the exercise of outstanding warrants, and 4,500,000 Series A Shares for issuance under a stock option and stock purchase plan.

We may issue additional Series A 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 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.

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Item 4.

Mine Safety Disclosures

Not Applicable.

Item 5.

Other Information.

None.

Item 6.

Exhibits

(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. 4 to Registration Statement on Form S-1 (333-187706) filed with the Securities and Exchange Commission on June 19, 2014.

* Filed herewith.

+ Confidential treatment requested.

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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.

 

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(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. 4 to Registration Statement on Form S-1 (333-187706) filed with the Securities and Exchange Commission on June 19, 2014.

* Filed herewith.

+ Confidential treatment requested.

 

 

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