Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

The matters addressed in this Item 2 that are not historical information constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, including statements about any of the following: any projections of earnings, revenue, gross profit, cash, effective tax rate, use of net operating losses, or any other financial items; the plans, strategies and objectives of management for future operations or prospects for achieving such plans; and any statements of assumptions underlying any of the foregoing. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks," "estimates," and similar expressions are intended to identify forward-looking statements. While BioTime may elect to update forward-looking statements in the future, it specifically disclaims any obligation to do so, even if the BioTime's estimates change, and readers should not rely on those forward-looking statements as representing BioTime's views as of any date subsequent to the date of the filing of this Quarterly Report on Form 10-Q for the three-months ended September 20, 2017 (the “Quarterly Report”). Although we believe that the expectations reflected in these forward-looking statements are reasonable, such statements are inherently subject to risks and BioTime can give no assurances that its expectations will prove to be correct. Actual results could differ materially from those described in this Quarterly Report because of numerous factors, many of which are beyond the control of BioTime. A number of important factors could cause BioTime’s results to differ materially from those indicated by such forward-looking statements, including those detailed under the heading "Risk Factors" included in this Quarterly Report.

The following discussion should be read in conjunction with BioTime interim condensed consolidated interim financial statements and the related notes provided under "Item 1- Financial Statements" above.

Company and Business Overview

We are a late-stage, clinical biotechnology company focused on developing and commercializing products addressing degenerative diseases. Our current clinical programs are targeting three primary sectors: aesthetics, ophthalmology and cell/drug delivery. Our clinical programs are based on two platform technologies: pluripotent cells that are capable of becoming any of the cell types in the human body, and a proprietary three-dimensional cell and drug delivery matrix technology. The foundation of our cell delivery platform is our HyStem ^® cell and drug delivery matrix technology. Renevia ^® , a cell delivery product, met its primary endpoint in a European Union pivotal clinical trial for the treatment of facial lipoatrophy in HIV patients earlier this year. Submission for approval of Renevia ^® is expected later this year, with an anticipated commercial launch in 2018. OpRegen ^® , a retinal pigment epithelium transplant therapy, is in a Phase I/IIa multicenter clinical trial for the treatment of dry age-related macular degeneration. Age-related macular degeneration (“AMD”) is the leading cause of blindness in people over the age of 60, and dry-AMD accounts for approximately 90% of all AMD.

 

We also have significant equity holdings in two publicly traded companies, Asterias Biotherapeutics, Inc., (“Asterias”), and OncoCyte Corporation (“OncoCyte”), which we founded and which, until recently, were our majority-owned consolidated subsidiaries. Asterias (NYSE American: AST) is presently focused on advancing three clinical-stage programs that have the potential to address areas of very high unmet medical needs in the fields of neurology (spinal cord injury) and oncology (Acute Myeloid Leukemia and lung cancer). OncoCyte (NYSE American: OCX) is developing confirmatory diagnostic tests for lung cancer, breast cancer, and bladder cancer utilizing novel liquid biopsy technology. Beginning on May 13, 2016 and February 17, 2017, we deconsolidated the financial statements and results of operations of Asterias and OncoCyte, respectively, from BioTime. As of September 30, 2017, we owned 14,674,244 shares of OncoCyte common stock with a value of approximately $110.8 million and 21,747,569 shares of Asterias common stock with a value of approximately $73.9 million.

We also seek to leverage our substantial intellectual property portfolio by advancing early-stage programs. In January 2017, we formed AgeX Therapeutics, Inc. (“AgeX”) to continue development of early-stage programs. In August 2017 AgeX completed an asset acquisition and stock sale pursuant to which it received certain assets from us for use in its research and development programs and raised $10.0 million in cash to finance its operations. AgeX will focus on the development of regenerative medicine technologies targeting the diseases of aging and metabolic disorders. Its initial programs are focusing on utilizing brown adipose tissue (“brown fat”) targeting diabetes and obesity, regenerative vascular progenitors for cardiovascular repair and our PureStem ^® technology with new discoveries in telomerase manipulation to create induced tissue regeneration (iTR). We now own approximately 85% of the issued and outstanding shares of AgeX common stock.

Critical Accounting Policies

This Management's Discussion and Analysis of Financial Condition and Results of Operations discusses and analyzes data in our unaudited Condensed Consolidated Interim Financial Statements, which we have prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). Preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors. Actual conditions may differ from our assumptions and actual results may differ from our estimates.

An accounting policy is deemed critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements. Management believes that there have been no significant changes during the nine months ended September 30, 2017 to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2016, except as follows:

Equity method of accounting for OncoCyte, at fair value – We use the equity method of accounting when we have the ability to exercise significant influence, but not control as defined under GAAP, over the operating and financial policies of a company in which we hold equity securities. Under the equity method of accounting for OncoCyte, which we have elected to measure at fair value, unrealized gains and losses are reported in the consolidated statements of operations as a non-operating gain or loss from equity securities held included in other income and expenses, net.

As further discussed in Notes 3 and 4 to our condensed consolidated interim financial statements included elsewhere in this report, beginning on February 17, 2017, we owned less than 50% of the outstanding shares of OncoCyte common stock and no longer had a controlling financial interest in OncoCyte. Although we no longer have control of OncoCyte, as defined by GAAP, we continue to exercise significant influence over OncoCyte and have accounted for OncoCyte using the equity method of accounting, electing the fair value method. Under the fair value method, the OncoCyte shares are marked to market using the closing price of its common stock on the NYSE American multiplied by the number of shares we hold, with changes in the fair value of the shares included in other income and expenses, net, in our consolidated statements of operations. The OncoCyte shares are considered a level 1 asset as defined by ASC 820.

Results of Operations

BioTime deconsolidated Asterias and OncoCyte financial statements and results of operations from BioTime's consolidated financial statements and results of operations beginning on May 13, 2016 and February 17, 2017, respectively, as further discussed below.

 

Primary components of OncoCyte's assets and liabilities included in BioTime at December 31, 2016

At December 31, 2016, the primary components of OncoCyte's assets and liabilities included in our condensed consolidated balance sheet, after intercompany eliminations, were as follows: OncoCyte's current assets were cash and cash equivalents of $10.2 million and prepaid expenses and other current assets of $0.3 million; the primary components of noncurrent assets of OncoCyte were intangible assets of $1 million and property, plant and equipment of $0.7 million; the primary components of OncoCyte's liabilities were accounts payable and accrued liabilities of $1.2 million and a capital lease liability of $0.5 million.

Comparison of Three and Nine Months Ended September 30, 2017 and 2016 (in thousands)

Revenues

The amounts in the tables below show BioTime's consolidated revenues for the periods presented (in thousands).

 

BioTime total revenues for the three months ended September 30, 2017 were $1.7 million, an increase of $0.2 million from the comparative period in 2016. The increase was primarily due to a $0.1 million increase in grant revenue received by Cell Cure and a $0.3 million increase in subscription and advertising revenues received by LifeMap Sciences, offset by $0.2 million in decreases in royalties and sales of research products and services. The Cell Cure grant revenue for the three months ended September 30, 2017 includes $1.2 million of a 7.2 million Israeli New Shekels (approximately $2.0 million) grant approved by the Israel Innovation Authority (the "IIA") for the development of OpRegen ^® .

BioTime total revenues decreased by approximately $2.4 million for the nine months ended September 30, 2017 as compared to the same period in the prior year, primarily related to the deconsolidation of Asterias, which contributed to $2.2 million in revenues during the prior year periods principally from grant income when Asterias revenues were consolidated and included in BioTime revenues.

 

Research and development expenses

 

The following tables show the amount of our total research and development expenses allocated to our primary research and development projects, by respective entity conducting the research and development, during the three and nine months ended September 30, 2017 and 2016 (in thousands).

⁽¹⁾ Amount includes research and development expenses incurred directly by BioTime or the named subsidiary and certain general research and development expenses, such as lab supplies, lab expenses, rent allocated, and insurance allocated to research and development expenses, incurred directly by BioTime on behalf of the subsidiary and allocated to the subsidiary.

 

⁽²⁾ BioTime includes Cell Cure, ES Cell International Pte. Ltd. (“ESI”) and OrthoCyte Corporation (“OrthoCyte”).

⁽³⁾ Although AgeX was capitalized during August 2017 by the contribution of assets from BioTime and cash from outside investors, for comparative purposes in the tables above, for the three and nine months ended September 30, 2017 and September 30, 2016, AgeX related research and development expenses that were previously included in BioTime have been reclassified to AgeX for all periods presented. See Note 10 to our condensed consolidated interim financial statements included elsewhere in this Report.

⁽⁴⁾ LifeMap Sciences, Inc. is a subsidiary of AgeX.

⁽⁵⁾ Since July 2017, LifeMap Solutions has ceased conducting its mobile health software application business and is not expected to incur any further research and development expenses.

⁽⁶⁾ For the nine months ended September 30, 2016, includes the period from January 1, 2016 through May 12, 2016, the date prior to the Asterias Deconsolidation.

⁽⁷⁾ For the nine months ended September 30, 2017, includes the period from January 1, 2017 through February 16, 2017, the date prior to the OncoCyte Deconsolidation.

The increases of $2.0 million and $4.5 million in BioTime related research and development expenses for the three and nine months ended September 30, 2017, from the respective periods in 2016, are mainly attributable to clinical trials and other work for the development of BioTime’s lead products, OpRegen ^®   for age related macular degeneration, and Renevia ^® for adipose fat transplant for facial aesthetics.

General and administrative expenses

The following tables show the amount of general and administrative expenses of BioTime and named subsidiaries during the three and nine months ended September 30, 2017 and 2016 (in thousands):

⁽¹⁾ Amount includes general and administrative expenses incurred directly by the named subsidiary and allocations from BioTime for certain general overhead expenses to the subsidiary.

 

⁽²⁾ BioTime includes Cell Cure, ESI, and OrthoCyte.

⁽³⁾ Although AgeX was capitalized during August 2017 by the contribution of assets from BioTime and cash from outside investors, for comparative purposes in the tables above, for the three and nine months ended September 30, 2017 and September 30, 2016, AgeX related general and administrative expenses that were previously included in BioTime have been reclassified to AgeX for all periods presented. See Note 10 to our consolidated interim financial statements included elsewhere in this Report.

⁽⁴⁾ LifeMap Sciences, Inc. is a subsidiary of AgeX.

⁽⁵⁾ Since July 2017, LifeMap Solutions has ceased conducting its mobile health software application business and is not expected to incur any further general and administrative expenses.

⁽⁶⁾ For the nine months ended September 30, 2016, includes the period from January 1, 2016 through May 12, 2016, the date prior to the Asterias Deconsolidation.

⁽⁷⁾ For the nine months ended September 30, 2017, includes the period from January 1, 2017 through February 16, 2017, the date prior to the OncoCyte Deconsolidation.

The increases of $1.7 million and $2.9 million in BioTime general and administrative expenses for the three and nine months ended September 30, 2017 as compared to the same periods in 2016 are primarily due to increases in compensation and related expenses resulting from the hire of additional key personnel, increased rent expense under the lease for our current office and laboratory facilities, which commenced in February 2016, a noncash expense recorded in July 2017 for the issuance of a warrant to a noncontrolling interest in Cell Cure and increases in investor relations and other consulting expenses.

General and administrative expenses include employee and director compensation allocated to general and administrative expenses, consulting fees other than those paid for science-related consulting, facilities and equipment rent and maintenance related expenses, insurance costs allocated to general and administrative expenses, stock exchange-related costs, depreciation expense, marketing costs, legal and accounting costs, and other miscellaneous expenses which are allocated to general and administrative expense.

Gain on sale of assets – Loss from operations for the nine months ended September 30, 2017 includes a $1.8 million gain we recognized on sale of certain assets by LifeMap Solutions. BioTime has determined not to provide further funding to LifeMap Solutions for its operations.

 

Other income and expenses, net

Other income/(expenses), net – The following table shows the amount of other income and expenses, net, during the three and nine months ended September 30, 2017 and 2016 (in thousands):

 

Unrealized gain or loss on OncoCyte shares – We own 14.7 million shares of common stock of OncoCyte. We elected to account for our shares in OncoCyte at fair value using the equity method of accounting beginning on February 17, 2017, the date of the OncoCyte Deconsolidation. Our OncoCyte shares had a fair value of $110.8 million as of September 30, 2017 and a fair value of $71.2 million as of February 17, 2017, based on the closing prices of OncoCyte common stock on the NYSE American of $7.55 per share and $4.85 per share on those respective dates. For the three months ended September 30, 2017, we recorded an unrealized gain of $34.5 million on our OncoCyte shares due to the increase in OncoCyte's stock price from June 30, 2017 to September 30, 2017 based on the closing prices of OncoCyte common stock on the NYSE American of $5.20 per share and $7.55 per share on those respective dates. For the nine months ended September 30, 2017, we recorded an unrealized gain of $39.6 million on the OncoCyte shares due to the increase in OncoCyte's stock price from February 17, 2017 to September 30, 2017, based on the closing prices of OncoCyte common stock on the NYSE American of $4.85 per share and $7.55 per share on those respective dates.

 

Unrealized gain or loss on Asterias shares – We own 21.7 million shares of common stock of Asterias. We elected to account for our shares in Asterias at fair value using the equity method of accounting beginning on May 13, 2016, the date of the Asterias Deconsolidation. Our Asterias shares had a fair value of $73.9 million as of September 30, 2017, and a fair value of $100.0 million as of December 31, 2016, based on the closing prices of Asterias common stock on the NYSE American of $3.40 per share and $4.60 per share on those respective dates. For the three months ended September 30, 2017, we recorded an unrealized loss of $3.3 million on our Asterias shares due to the decrease in Asterias' stock price from June 30, 2017 to September 30, 2017, based on the closing prices of Asterias common stock on the NYSE American of $3.55 per share and $3.40 per share on those respective dates. For the nine months ended September 30, 2017, we recorded an unrealized loss of $26.1 million on the Asterias shares due to the decrease in Asterias' stock price from December 31, 2016 to September 30, 2017, based on the closing prices of Asterias common stock on the NYSE American of $4.60 per share and $3.40 per share on those respective dates.

 

Unrealized gain on deconsolidation of OncoCyte – During the nine months ended September 30, we recorded an unrealized gain of $71.7 million in connection with the OncoCyte Deconsolidation on February 17, 2017.

We expect our other income and expenses, net, to continue to fluctuate each reporting period based on the changes in the market prices of our Asterias and OncoCyte shares, which could significantly impact our net income or loss reported in our consolidated statements of operations for each period.

Loss on extinguishment of related party convertible debt – We recognized a $2.8 million noncash loss on extinguishment of related party convertible in connection with the purchase of all of the outstanding Cell Cure Convertible Notes from HBL on July 10, 2017.

BioTime's share of losses in equity method investment in Ascendance and other income/(expense), net – BioTime's share of losses in equity method investment in Ascendance for the three and nine month periods ended September 30, 2016 were $0.9 million and $1.2 million, respectively. Other income and expenses, net, in 2017 and 2016 consist primarily of net foreign currency transaction gains and losses recognized by Cell Cure and ESI.  Foreign currency transaction gains and losses for the three and nine months ended September 30, 2017 and 2016 are principally related to the remeasurement of the US dollar denominated convertible notes payable by Cell Cure to BioTime and other Cell Cure shareholders.

Income Taxes

The deconsolidation of Asterias and OncoCyte financial statements from BioTime were not taxable transactions and did not create a current income tax payment obligation. The market value of the Asterias and OncoCyte shares we hold creates a deferred tax liability to us based on the closing market price of the shares, less our tax basis in the shares. The deferred tax liability generated by the Asterias and OncoCyte shares that we hold is a source of taxable income to us that will more likely than not result in the realization of our deferred tax assets to the extent of those deferred tax liabilities. Because the deferred tax liabilities are determined based on the closing prices of those shares and, due to the inherent unpredictability of future prices of those shares, we cannot reliably estimate or project those deferred tax liabilities on an annual basis. Therefore, the deferred tax liabilities pertaining to Asterias and OncoCyte shares, measured as of the period end being reported on, and the related impacts to the valuation allowance changes and deferred tax assets, are recorded in the interim period in which they occur.

A valuation allowance is provided when it is more likely than not that some portion of our deferred tax assets will not be realized.

For federal income tax purposes, as a result of the deconsolidation of Asterias and OncoCyte discussed in Note 3 to our consolidated financial statements included elsewhere in this report, and the deferred tax liabilities generated from the Asterias and OncoCyte share market values from their respective deconsolidation dates, including the changes to those deferred tax liabilities due to changes in the Asterias and OncoCyte stock price through September 30, 2017, our deferred tax liabilities exceeded our deferred tax assets by $4.8 million as of September 30, 2017. Accordingly, as of September 30, 2017, for federal income tax purposes, we released our entire valuation allowance and recognized a federal deferred income tax expense of $4.8 million during the three and nine months ended September 30, 2017. For state income tax purposes, we have a full valuation allowance on our state deferred tax assets as of September 30, 2017, and December 31, 2016 and, accordingly, we did not record any state tax provision or benefit for all periods presented.

 

We had established a full valuation allowance as of December 31, 2016 and 2015 due to the uncertainty of realizing future tax benefits from our net operating loss carryforwards and other deferred tax assets. Accordingly, we did not record any provision or benefit for income taxes for the nine months ended September 30, 2016.

We expect that deferred income tax expense or benefit we record each reporting period, if any, will vary depending on the change in the closing stock prices of Asterias and OncoCyte from period to period and the related changes in those deferred tax liabilities and our deferred tax assets and other credits, including changes in the valuation allowance, for each period.

Liquidity and Capital Resources

At September 30, 2017, we had $18.2 million of cash, cash equivalents, and available for sale securities on hand. Our cash on hand at September 30, 2017 included $9.2 million held by AgeX. We received approximately $26.7 million of additional cash during October 2017 from an underwritten public offering of our common shares.  See Note 14 to Notes to Interim Condensed Consolidated Financial Statements.

 

We also hold shares of Asterias and OncoCyte common stock which had a combined market value of $184.7 million at September 30, 2017. Although we have no present plans to liquidate our holdings of Asterias or OncoCyte shares, if we need near term working capital or liquidity to supplement our cash and cash equivalents for our operations, we may sell some or all of our Asterias or OncoCyte shares, as necessary. The market value shown may not represent the amount that could be realized in a sale of Asterias or OncoCyte shares due to various market and regulatory factors, including trading volume or market depth factors and volume and manner of sale restrictions under Federal securities laws, prevailing market conditions and prices at the time of any sale, and subsequent sales of securities by the subsidiaries.

On August 8, 2017, the IIA approved a grant for 2017 of up to 7.2 million Israeli New Shekels (approximately $2.0 million) for the development of OpRegen ^® of which we recorded a $1.2 million grant receivable as of September 30, 2017.

On September 18, 2017, we were awarded a grant of up to $1.56 million from the Small Business Innovation Research (SBIR) program of the National Institutes of Health (NIH). The SBIR grant provides funding to further develop our innovative, next generation vision restoration program for advanced retinal diseases and injuries other than age related macular degeneration. The SBIR grant funds will become available for payment by the NIH as allowable expenses are incurred by us. As of September 30, 2017, we had not yet received any portion of the grant funds.

Since inception, we have incurred significant operating losses and have funded our operations primarily through the issuance of equity securities, payments from research grants, data base subscription revenues, royalties from product sales and sales of research products and services. At September 30, 2017, we had an accumulated deficit of approximately $144.4 million, working capital of $17.2 million and shareholders' equity of $209.0 million. We have evaluated our projected cash flows and believe that our $18.2 million of cash, cash equivalents and available for sale securities as of September 30, 2017, and the net proceeds of approximately $26.7 million raised in the underwritten public offering during October 2017, provide sufficient cash, cash equivalents and liquidity to carry out our current operations through at least twelve months from the issuance date of the consolidated financial statements included elsewhere in this Report.

Our projected cash flows are subject to various risks and uncertainties, and the unavailability or inadequacy of financing to meet future capital needs could force us to modify, curtail, delay, or suspend some or all aspects of our planned operations. Our determination as to when we will seek new financing and the amount of financing that we will need will be based on our evaluation of the progress we make in our research and development programs, any changes to the scope and focus of those programs, and projection of future costs, revenues, and rates of expenditure. For example, clinical trials being conducted for our OpRegen ^® program will be funded in part with funds from grants and not from cash on hand. If we were to lose our grant funding or we are unable to continue to provide working capital to the OpRegen ^® program, we may be required to delay, postpone, or cancel our clinical trials or limit the number of clinical trial sites, unless we are able to obtain adequate financing from another source that could be used for our clinical trials. We cannot assure that adequate financing will be available on favorable terms, if at all. Sales of additional equity securities by us or our subsidiaries and affiliates could result in the dilution of the interests of present shareholders.

 

Cash flows used in operating activities

During the nine months ended September 30, 2017, our total research and development expenses were $19.3 million and our general and administrative expenses were $14.1 million. Net income attributable to BioTime for the nine months ended September 30, 2017 amounted to $52.0 million. Net cash used in operating activities during this period amounted to $24.8 million, which includes approximately $1.2 million of cash used by OncoCyte for the period from January 1, 2017 through February 16, 2017, the period during which OncoCyte's results were consolidated with BioTime. The difference between the net income attributable to us and net cash used in operating activities during the nine months ended September 30, 2017 was primarily attributable to the following noncash items: $71.7 million gain recorded on the OncoCyte Deconsolidation, $39.6 million unrealized gain on the OncoCyte shares we own due to an increase in the OncoCyte stock price since the OncoCyte Deconsolidation, $26.1 million unrealized loss on the Asterias shares we own due to a decline in the Asterias stock price, $4.8 million of deferred income tax expense, $3.2 million loss attributable to non-controlling shareholders, stock-based compensation expense of $2.9 million, $2.8 million loss on the extinguishment of Cell Cure convertible debt, $2.4 million of depreciation and amortization expenses, $1.8 million of gain on the sale of LifeMap Solutions assets, and $1.5 million of foreign currency remeasurement gains and other items. Changes in working capital impacted our cash used in operations by $0.9 million as a net source of cash.

Cash flows used in investing activities

During the nine months ended September 30, 2017, we used $9.6 million of cash for investing activities. The primary components of this use of cash were $8.9 million resulting from the deconsolidation of OncoCyte's cash and cash equivalents balance, and $0.9 million used to purchase property, plant and equipment.

Cash flows generated by financing activities

During the nine months ended September 30, 2017, we generated $29.0 million in cash from financing activities. The primary components of the sources of cash from financing activities were $18.5 million in net proceeds from the sale of 7,453,704 common shares in an underwritten public offering, after deducting underwriting discounts, commissions and expenses related to the financing, $10.0 million in net proceeds received by AgeX from the sale of shares of its common stock to new investors, $0.4 million in related party convertible loans obtained by Cell Cure from shareholders other than BioTime, and a $0.2 million reimbursement from our landlord on tenant improvements.

Off-Balance Sheet Arrangements

As of September 30, 2017 and December 31, 2016, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.