Lineage Cell Therapeutics, Inc. - Annual Report: 2018 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018

OR

☐ 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 1-12830

BioTime, Inc.

(Exact name of registrant as specified in its charter)

1010 Atlantic Avenue, Suite 102

Alameda, California 94501

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code (510) 521-3390

Securities registered pursuant to Section 12(b) of the Act

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

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. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided to Section 13(a) 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): Yes ☐ No ☒

The approximate aggregate market value of voting common shares held by non-affiliates computed by reference to the price at which common shares were last sold as of June 30, 2018 was $176.7 million. Shares held by each executive officer and director and by each person who beneficially owns more than 5% of the outstanding common shares have been excluded in that such persons may under certain circumstances be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of common shares outstanding as of March 11, 2019 was 149,360,926.

Documents Incorporated by Reference

Portions of the registrant’s Proxy Statement for 2019 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A within 120 days of the Registrant’s fiscal year ended December 31, 2018 are incorporated by reference in Part III

BioTime, Inc.

Table of Contents

PART I

This Annual Report on Form 10-K (“Report”) contains forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historical facts contained in this Report are forward-looking statements. In some cases, you can identify forward-looking statements by words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or the negative of these words or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

Any forward-looking statements in this Report reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Part I, Item 1A. Risk Factors and elsewhere in this Report. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

References to “BioTime”, “we” and “our” means BioTime, Inc. and its subsidiaries and affiliates unless the context otherwise indicates.

The description or discussion, in this Report, 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.

INDUSTRY AND MARKET DATA

This Report contains market data and industry forecasts obtained from industry publications, third party market research, and publicly available information. These publications generally state that the information contained therein has been obtained from sources believed to be reliable. While we believe that the information from these publications is reliable, we have not independently verified such information.

This Report also contains estimates and other statistical data made by independent parties and by us relating to market size and growth and other data about our industry. We obtained the industry and market data in this Report from our own research as well as from industry and general publications, surveys, and studies conducted by third parties, some of which may not be publicly available. Such data involves several assumptions and limitations and contains projections and estimates of the future performance of the industries in which we operate that are subject to a high degree of uncertainty. We caution you not to give undue weight to such projections, assumptions, and estimates.

ITEM 1. BUSINESS

Overview

BioTime is a clinical-stage biotechnology company developing new cellular therapies for degenerative retinal diseases, neurological conditions associated with demyelination, and aiding the body in detecting and combating cancer. Our programs are based on our proprietary cell-based therapy platform and associated development and manufacturing capabilities. With our platform we develop and manufacture specialized, terminally-differentiated human cells from our pluripotent and progenitor cell starting materials. These differentiated cells are developed either to replace or support cells that are dysfunctional or absent due to degenerative disease or traumatic injury, or are administered as a means of helping the body mount an effective immune response to cancer.

Product Candidates & Other Programs

We have three cell therapy programs in clinical development:

We also have cell/drug delivery programs based upon our proprietary HyStem^® cell and drug delivery matrix technology. HyStem was designed to support the formulation, transfer, retention, and engraftment of cellular therapies. We also established and support multiple collaborations with both academic and for-profit partners to develop HyStem for additional therapeutic uses, and we sell both research and GMP-grade HyStem to support additional external research and development activities.

Our lead cell delivery clinical program is Renevia^®, a medical device developed as a replacement for whole adipose tissue in cell assisted lipotransfer (CAL) procedures, and which met its primary endpoint of change in hemifacial volume at 6 months in the treated patients compared to patients in the delayed treatment arm as measured by three-dimensional photographic volumetric assessment, in a European pivotal clinical trial in patients with HIV-associated facial lipoatrophy. In 2018, we submitted a design dossier for EU market clearance (CE Mark) for the use of Renevia as a device to aid in transferring a patient’s own adipose tissue to treat certain forms of facial lipoatrophy, or fat loss. We have ongoing discussions with our European notified body and are currently awaiting notification as to its status. We expect to receive a decision from the notified body in the second half of 2019.

Ownership in Other Companies

In addition to seeking to create value for shareholders by developing product candidates and other technologies through our clinical development programs, we also seek to create value from our technologies through partnering and strategic transactions. Two publicly-traded companies, OncoCyte Corporation (“OncoCyte”, NYSE American: OCX) and AgeX Therapeutics, Inc. (“AgeX”, NYSE American: AGE) were founded by BioTime in order to develop products from technologies invented within BioTime. Both companies subsequently raised capital and we distributed a portion of our shares in each company to our shareholders. A portion of AgeX common stock was also sold to Juvenescence Limited (“Juvenescence”) in exchange for $21.6 million of cash and a $21.6 million convertible promissory note.

Currently, our largest equity holding (approximately 28%) is in OncoCyte which we formed in 2015 to continue development of cancer diagnostic technology, and which is now focused on developing confirmatory diagnostic tests for lung cancer utilizing novel liquid biopsy technology. In late January 2019, OncoCyte announced successful results of its DetermaVu R&D validation study. Oncocyte announced in February 2019 that it had raised $40.25 million in gross proceeds in a public offering of its common stock. See “—Recent Transactions Affecting Our Corporate Organization,” below.

We also have a minority equity holding (approximately 4.8%) in AgeX Therapeutics, Inc., which we formed in 2017 to continue development of certain early-stage programs relating to cell immortality, regenerative biology, aging, and age-related diseases. AgeX had been our consolidated subsidiary until its deconsolidation August 30, 2018. See ““—Recent Transactions Affecting Our Corporate Organization,” below. AgeX’s initial programs focus on utilizing brown adipose tissue to target diabetes, obesity, and heart disease, and induced tissue regeneration technology utilizing the human body’s own abilities to scarlessly regenerate tissues damaged from age or trauma.

We also continue to hold the $21.6 million convertible promissory note issued by Juvenescence.

The combined value of these holdings as of March 13, 2019, was $85.5 million. The value of the Juvenescence note is based on the principal amount of $21.6 million plus accrued interest. The values of OncoCyte and AgeX are based on the closing price of their common stock on that date. See “ITEM 1A. RISK FACTORS—Risks Related to Our Business Operations and Capital Requirements—The value of our investments in other companies fluctuates based on their respective stock prices and could be negatively impacted by poor business performance,” below. Though our principal focus is on advancing our three cell therapy programs in clinical development, we may seek to create additional value through corporate transactions, as we have in the past. Our securities holdings also may be a significant source of capital to fund our operations as an alternative to issuing additional BioTime securities.

Corporate Information

BioTime is incorporated in the State of California. Our common stock trades on the NYSE American and the Tel Aviv Stock Exchange under the symbol “BTX.” Our principal executive offices are at 1010 Atlantic Avenue, Suite 102, Alameda, CA 94501, and our phone number at that address is (510) 521-3390. Our website address is www.biotime.com. The information on, or that can be accessed through our website is not part of this Report. We also make available, free of charge through our website, our most recent annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after the reports are electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”).

Recent Transactions Affecting Our Corporate Organization

Asterias Merger

On March 8, 2019, we acquired Asterias Biotherapeutics, Inc. (“Asterias”) via merger. In the acquisition, each outstanding share of Asterias common stock was converted into our common stock at an exchange ratio of 0.71 BioTime shares for each Asterias share.

Prior to May 13, 2016, Asterias was a majority-owned and consolidated subsidiary of BioTime. On May 13, 2016, BioTime’s percentage ownership decreased from 57.1% to 48.7% as a result of the sale of shares of common stock by Asterias in a public offering, resulting in BioTime’s loss of control of Asterias under generally accepted accounting principles in the U.S. (“GAAP”). Accordingly, BioTime deconsolidated Asterias effective May 13, 2016. From May 13, 2016 until the consummation of the merger on March 8, 2019, BioTime accounted for its ownership of Asterias under the equity method of accounting, electing the fair value option, with the investment carried on the consolidated balance sheet at fair value and all subsequent changes in fair value included in BioTime’s consolidated statements of operations in other income and expenses, net. The deconsolidation of Asterias is sometimes referred to as the “Asterias Deconsolidation” in this Report.

Audited financial statements of Asterias for the years ended December 31, 2018 and 2017 are included as financial statement schedules in Part IV, Item 15, and are filed as an exhibit to this Report.

AgeX Deconsolidation and Distribution

On August 30, 2018, we entered into a Stock Purchase Agreement with Juvenescence and AgeX, under which we sold 14,400,000 of our shares of AgeX common stock to Juvenescence for $3.00 per share. The transaction resulted in over $43 million in non-dilutive financing for BioTime.

Upon completion of that transaction, our percentage ownership of AgeX’s outstanding shares of common stock decreased from 80.4% to 40.2%, and Juvenescence’s percentage ownership increased from 5.6% to 45.8%. As a result of the transaction, as of August 30, 2018, AgeX was no longer our subsidiary and effective that date, we deconsolidated AgeX’s consolidated financial statements and consolidated results of operations from BioTime’s under GAAP due to the decrease in our percentage ownership in AgeX to below 50%. Prior to that date, AgeX was our majority-owned and consolidated subsidiary. Beginning on August 30, 2018 through November 28, 2018 (the date on which AgeX began trading as a public company as discussed below), we accounted for AgeX using the equity method of accounting, electing the fair value option, recording the retained interest in AgeX at fair value on August 30, 2018 with all subsequent changes in fair value included in our consolidated statements of operations in other income and expenses, net.

On November 28, 2018, AgeX began trading as a public company on the NYSE American (under the symbol “AGE”) and, on that date, we distributed 12.7 million shares of AgeX common stock we owned to our shareholders, on a pro rata basis, in the ratio of one share of AgeX common stock for every 10 shares of our common stock they owned. This distribution was accounted for at fair value as a taxable, dividend-in-kind transaction in the aggregate amount of $34.4 million. Immediately following the distribution, we owned 1.7 million shares of AgeX common stock, all of which we still own, and which represents approximately 4.8% of AgeX’s outstanding common stock as of December 31, 2018. We hold the shares of AgeX common stock that we own as marketable equity securities.

As of, and for each reporting period after August 30, 2018, the fair value of our ownership interest in AgeX will be determined by multiplying the fair value of a share of AgeX common stock by the number of such shares we own.

AgeX’s consolidated assets and liabilities are not included in our audited consolidated balance sheet at December 31, 2018, due to the deconsolidation. The fair value of the AgeX shares we owned is shown on our audited consolidated balance sheet as of December 31, 2018. Our consolidated balance sheet at December 31, 2017 includes AgeX’s consolidated assets and liabilities, after intercompany eliminations. Our audited consolidated statements of operations for the year ended December 31, 2018 include AgeX’s consolidated results for the period through August 29, 2018, the day immediately preceding the deconsolidation. For the year ended December 31, 2017, our consolidated results include AgeX’s consolidated results.

The deconsolidation of AgeX is sometimes referred to as the “AgeX Deconsolidation” in this Report.

The distribution of AgeX common stock is sometimes referred to as the “AgeX Distribution” in this Report.

Audited consolidated financial statements of AgeX for the years ended December 31, 2018 and 2017 will be included as financial statement schedules in Part IV, Item 15 and will be filed as an exhibit by an amendment to this Report.

OncoCyte Deconsolidation

Effective February 17, 2017, we deconsolidated the financial statements and results of operations of OncoCyte under GAAP due to the decrease in our percentage ownership in OncoCyte to below 50% as a result of OncoCyte’s issuance of 625,000 shares of its common stock upon exercise of warrants. Prior to that date, OncoCyte was our majority-owned and consolidated subsidiary. Since February 17, 2017, we have accounted for OncoCyte using the equity method of accounting, electing the fair value option, with all subsequent changes in fair value included in our consolidated statements of operations in other income and expenses, net. As of, and for each reporting period after February 17, 2017, the fair value of our ownership interest in OncoCyte has been determined by multiplying the closing price of OncoCyte common stock as quoted on NYSE American by the number of such shares we owned.

OncoCyte’s assets and liabilities are not included in our audited consolidated balance sheet at December 31, 2017 due to the deconsolidation. The fair value of OncoCyte shares we owned is shown on our audited consolidated balance sheet as of December 31, 2018 and 2017. Our audited consolidated statements of operations for the year ended December 31, 2017 include OncoCyte’s results from January 1, 2017 through February 16, 2017, the day immediately preceding the deconsolidation. OncoCyte’s results are not included in our audited consolidated statements of operations for the year ended December 31, 2018.

The deconsolidation of OncoCyte is sometimes referred to as the “OncoCyte Deconsolidation” in this Report.

Audited financial statements of Onco Cyte for the years ended December 31, 2018 and 2017 will be included as financial statement schedules in Part IV, Item 15 and will be filed as an exhibit by an amendment to this Report.

For further discussion see the Notes to Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Report.

2018 and Early 2019 Highlights

We achieved numerous strategic accomplishments during 2018 and early 2019, including advancing clinical trials and product development in several key programs.

Business Strategy

Our goal is to become a leading cell therapy company developing differentiated pluripotent cells into specific cell types for use as whole cell treatments to restore diseased or diminished functions, such as impaired vision, loss of movement and sensation, or to increase immune response to tumors. Significant near-term activities that underlie our business strategy include:

Cell Therapy Technology

We believe we are a leader in pluripotent cell asset development and lineage derivation protocols. Pluripotent cells, which are widely published as capable of becoming any human cell type, have potential applications in many areas of medicine with large unmet patient needs, including certain age-related degenerative diseases and degenerative conditions for which there presently are no cures. We currently are focused on developing pluripotent cells into three specific cell types: retinal pigment epithelial cells, oligodendritic progenitor cells and dendritic cells.

Pluripotent Stem Cells

Unlike pharmaceuticals that require a molecular target, cellular therapies are often aimed at regenerating or replacing affected cells and tissues and or improving bodily functions such as immune surveillance, and therefore, may have broader or more suitable applicability than many pharmaceutical products. Small molecules and biologic therapies that require systemic delivery into the body often have unexpected results, or side effects, that can limit their usefulness. Cell replacement is locally administered, so systemic side effects are usually not a primary concern in therapeutic development. The risk profile more closely resembles that of transplant medicine, focused more on whether the transplanted cells are rejected by the body and whether the cells function as expected. We currently are using our pluripotent stem cells as biological starting material from which we derive three separate and specific cell types, each of which are product candidates currently in clinical testing.

Cell Therapy Product Candidates

OpRegen

OpRegen is our lead ophthalmic product candidate (currently in a Phase I/IIa clinical trial) for the treatment of advanced dry-AMD (age-related macular degeneration) with geographic atrophy (GA). AMD is a gradual, progressive, deterioration of the macula, the small sensitive area in the center of the retina that provides clear, high definition central vision. AMD affects over 30 million people worldwide and approximately 1.6 million people are diagnosed annually in the U.S. It is the leading cause of vision loss in people over the age of 60 in the developed world. Once the atrophy involves the fovea (the center of the macula), patients lose their central vision, making facial recognition, reading and driving difficult or impossible, and potentially resulting in legal blindness. Its cause is unknown, but thought to be multifactorial (e.g. genetics, environmental influences, age). There are two forms of AMD, the dry form and the wet form. Dry-AMD typically advances slowly toward GA in which retinal pigment epithelial (RPE) cells and photoreceptors deteriorate over time. RPE cells support and nourish the retina. Approximately 85-90% of AMD patients suffer from dry-AMD, for which there is no FDA-approved medical therapies. Dry-AMD may also lead to wet-AMD, a condition for which there are FDA-approved treatments, but these treatments but have not been approved for the treatment of dry-AMD. Physicians often recommend a healthy diet, exercise, and/or nutritional supplements for dry-AMD, but nutritional supplements have shown limited efficacy in delaying the onset of more progressive disease in longer-term studies.

We believe one of the most promising future therapies for dry-AMD is to replace the layer of damaged RPE cells. OpRegen is a cell replacement therapy derived from our pluripotent cell technology. Using a proprietary directed differentiation method, OpRegen is a formulation of animal-free RPE cells with high yield and purity that can be transplanted directly into the patient’s eye, where the patient’s own RPE cells are missing or dysfunctional. The OpRegen therapeutic approach is designed to replace damaged or lost RPE cells with the goal of slowing disease progression to preserve and/or restore visual function.

Preclinical studies in the Royal College of Surgeons (RCS) rat have shown that following a single subretinal injection, OpRegen as a suspension of cells rapidly organized into their natural monolayer structure and survived until the end of the study, which we believe is critical to the potential success of OpRegen in humans. Additionally, rats receiving OpRegen had objective evidence of improved optomotor tracking, indicating functional visual improvement compared to control animals.

OpRegen is intended to be an allogeneic, “off-the-shelf,” product provided to retinal surgeons in an “easy-to-use” form for transplantation. Unlike other investigational treatments for dry-AMD, and currently-marketed treatments for wet-AMD (Ranibizumab (Lucentis^®) and Aflibercept (Eylea^®)), that require multiple, frequent injections into the eye, we expect OpRegen would potentially be administered in a single procedure, or once every several years.

The patients in our ongoing Phase I/IIa clinical study are 50 years of age or older, whose dry-AMD has advanced to the GA stage, with absence of additional concomitant ocular disorders. The eye in which the disease has progressed the most is treated, while the other eye serves as a control. Following injection, the patients are followed for 12 months at specified intervals to evaluate the safety and tolerability of OpRegen.

Following the initial 12-month period, patients are evaluated at longer intervals for up to an additional five years following administration. A secondary objective of the clinical trial is to examine the ability of transplanted OpRegen to engraft, survive, and modulate disease progression in the patients. In addition to thorough characterization of visual function, several vision tests are used to quantify stabilization or improvements in visual function. We also perform anatomical evaluation imaging to assess the restoration of the structure of the retina.

Interim data from the first 12 subjects in Cohorts 1-3 of our ongoing Phase I/IIa clinical study have been encouraging and suggest that OpRegen RPE cells are generally well-tolerated when administered by subretinal injection in these legally blind patients with large areas of GA that have encompassed the foveal area. The surgical procedures were generally well-tolerated, with spectral domain optical coherence tomography (SD-OCT) images showing absorption of the subretinal fluid in the bleb less than 48 hours after surgery and healing of the site of retinal penetration by the cannula within a few weeks. Initial findings using a variety of imaging modalities suggest presence of cells in the subretinal space, an observation consistent with, and supported by, the data from preclinical studies of OpRegen. Findings on clinical examination by different imaging modalities show potential improvements in retinal structure, which could precede visual functional improvements. Though it is not definitively known at this time whether these changes represent engraftment and survival of the transplanted cells, data from the preclinical animal studies suggest this is the most likely scenario. Best corrected visual acuity (BCVA) has remained relatively stable in both the treated and non-treated eyes of these advanced AMD patients over the course of the study to date.

Importantly, in this safety-focused study, no unexpected ocular adverse events (AEs) have been observed and those events expected to occur based on the procedures involved in OpRegen administration, such as vitrectomy, have been mild in severity. The majority of these subjects had pre-existing epiretinal membranes (ERMs) at the time of study enrollment and several have experienced new or worsening ERM following the surgical procedure and OpRegen injection and these subjects are being monitored during study follow-up. One instance of retinal detachment occurred in a patient who was legally blind prior to treatment. The event was not assigned as related to treatment, procedure, or to the combination. The patient continued in the study following successful surgical repair. The independent data safety monitoring board (DSMB) approved moving to the fourth cohort based on the safety data from the first three cohorts. Cohort 4 incorporates an additional variety of objective and subjective assessments to look for signs of potential efficacy as well as potential anatomical changes indicative of OpRegen cell function following implantation.

Many of the AEs observed in subretinal procedures are related to the delivery technique utilized during the surgery. In January 2019, we announced an exclusive partnership with Orbit Biomedical to assess their FDA-cleared Orbit Subretinal Delivery System, a vitrectomy-free delivery device for administration of OpRegen within the ongoing clinical study. The device allows for access to the subretinal space via a suprachoroidal approach without creating a hole in the retina and compromising its structural integrity. We believe that the use of this device could significantly decrease the number of AEs and improve dose control of cells in our clinical trials.

We completed enrollment in the first three cohorts of the trial (twelve patients) in the middle of 2018. We began enrollment of Cohort 4 shortly thereafter and have treated three patients to date. We are in the process of amending our clinical protocol to incorporate the Orbit device and our new thaw and inject (TAI) formulation into our Phase I/IIa clinical trial, and we intend to dose at least six patients with the Orbit device. We plan to enroll additional subjects for Cohort 4 at three currently participating sites in the United States. These sites are: Retina-Vitreous Associates in Los Angeles, Retinal Consultants Medical Group in Sacramento and West Coast Retina Medical Group in San Francisco.

We have established an innovative cell therapy manufacturing facility in the Jerusalem Bio Park on the campus of Hadassah University Hospital in Jerusalem, Israel. Our facility is equipped to produce cGMP-grade OpRegen and a range of other cell therapy products for human use in clinical trials as well as at a scale suitable for commercial introduction.

OPC1

OPC1 is our lead product candidate for the treatment of acute spinal cord injury (“SCI”). SCI occurs when the spinal cord is subjected to a severe crush or contusion injury, such as that caused by a car or motorcycle accident and typically results in severe functional impairment, including limb paralysis, aberrant pain signaling, and loss of bladder and sexual function. There are approximately 18,000 new spinal cord injuries annually in the U.S. (NSCIC SCI Facts and Figures at a Glance (2019)), and there are currently no FDA-approved drugs specifically for the treatment of SCI, although methylprednisolone, a corticosteroid generally used as an anti-inflammatory drug, is sometimes prescribed on an off-label basis to reduce acute inflammation in the injured spinal cord immediately after injury. It is believed that to effect substantial benefit in treating this complex injury, multiple mechanisms of action are required, such as introduction of biologics that preserve surviving neurons and stimulate new nerve axon outgrowth, suppression of lesion formation at the injury site, generation of new blood vessels to repair the ischemic damage from injury, and myelination of the demyelinated and newly formed nerve axons. A key therapeutic target in SCI is replacement of oligodendrocytes that are selectively lost at the injury site. As the sole source of the insulating protein myelin in the brain and spinal cord, oligodendrocytes wrap around nerve axons and allow conduction of electrical impulses throughout the central nervous system (“CNS”). Just as the gain of cognitive and motor functions early in life reflects the progression of connectivity and myelination within the developing CNS, the functional impairments that can occur after a traumatic injury such as SCI are a direct result of severed connections and demyelination.

OPC1 is an oligodendrocyte progenitor cell therapy derived from our pluripotent cell technology under Current Good Manufacturing Practice (cGMP) conditions using a directed differentiation method. These cells are stored frozen until ready for use as direct administration into the injured spinal cord. Based on preclinical studies, when OPC1 is transplanted into the injured spinal cord, the cells undergo further maturation to generate a replacement population of oligodendrocytes at the injury site that are capable of remyelinating denuded and newly formed nerve axons. Prior to their maturation, the transplanted oligodendrocyte progenitor cells stimulate additional reparative processes, including promotion of neuron survival and nerve axon outgrowth, and induction of blood vessel formation in and around the injury site. In addition, OPC1 cells rapidly migrate from the injection point to the injury site where they generate a supportive tissue matrix and suppress the formation of a lesion cavity. Based on the multiple reparative properties associated with OPC1, we believe this candidate cell therapy product is ideally suited to treat neurological conditions such as SCI and other demyelination and demyelination disorders of the CNS.

Under a grant for clinical development, the development of OPC1 has been supported by $14.3 million in funds from the California Institute for Regenerative Medicine (“CIRM”) from 2014 to date. We intend to apply for additional grants from CIRM for the program’s continued development.

OPC1 has been tested in two clinical trials to date: a five patient Phase I safety trial and a 25 patient Phase I/IIa dose escalation trial (the “SCiStar trial”). The SCiStar trial was conducted at 9 sites in the United States.

In January 2019, Asterias (our now wholly owned subsidiary) announced the following 12-month data from the SCiStar trial:

The FDA designated OPC1 as a Regenerative Medicine Advanced Therapy (“RMAT”) for the treatment of acute SCI and granted it Orphan Drug Designation, which includes the ability for increased interfacing with the FDA during clinical development.

We intend to transfer all cGMP manufacturing processes, including the establishment of H1 cell banks and the OPC1 process development and manufacturing for clinical studies, to our cell therapy manufacturing facility in Jerusalem, Israel where OpRegen process development and production are currently ongoing.

Asterias management had a Type B meeting with the FDA to discuss the next clinical trial of OPC1. We are now analyzing the data from the SCiStar trial to inform us as to how to proceed with further discussions with the FDA. Additionally, we are leveraging our manufacturing capabilities and process development expertise learned from OpRegen to support OPC1’s development.

Because OPC1 has been shown to promote CNS repair through multiple reparative mechanisms, we believe its therapeutic benefit extends beyond SCI to other types of neurological injury and disease, particularly those that involve demyelination. Through ongoing collaborations with academic researchers, OPC1 is currently in preclinical development as treatment for both ischemic stroke and multiple sclerosis, two additional neurological conditions with demyelination as a key component of their pathology. In both cases, the preclinical data generated thus far has provided initial proof of concept efficacy of OPC1, which we intend to use to seek funding for consideration of further preclinical development.

VAC2

VAC2 is our lead product candidate for the treatment of cancer. Cancer afflicts millions worldwide and is one the largest unmet clinical needs with current treatment options providing limited efficacy and a wide range of debilitating side effects. To provide a more effective and targeted treatment, we are developing VAC2 as an allogeneic, or non-patient specific, cancer vaccine candidate designed to stimulate patient immune responses to telomerase which is commonly expressed in cancerous cells but not in normal adult cells. VAC2, which is produced from our pluripotent cell technology using a directed differentiation method, is comprised of a population of mature dendritic cells. As the most potent type of antigen presenting cell in the body, dendritic cells instruct our body’s immune system to attack and eliminate harmful pathogens and unwanted cells. To target cancerous cells, VAC2 is engineered to express the tumor-selective antigen telomerase, which is found in over 85% of all cancers. Because the tumor antigen is loaded exogenously into the dendritic cells prior to administration, VAC2 is a platform technology that can be modified to carry any antigen, including patient-specific tumor neo-antigens. Using pluripotent cells as the starting material for VAC2 production adds several additional advantages to this candidate therapeutic. Compared to technologies that rely on the use of a patient’s own blood, our pluripotent cell technology provides a scalable system for production of a large number of vaccine doses in a single lot, lower manufacturing costs, greater product consistency, and off-the-shelf availability to provide broader access to patients. In addition, we believe that as an allogeneic therapy, VAC2 has the potential to stimulate a more robust immune response through an adjuvant effect resulting from the partial immune mismatch between the VAC2 cells and patients receiving the therapy.

In September 2014, Asterias initiated clinical development of VAC2 by entering into a Clinical Trial and Option Agreement (the “CRUK Agreement”) with Cancer Research UK (“CRUK”) and Cancer Research Technology Limited (“CRT”), a wholly-owned subsidiary of CRUK, under which CRUK agreed to fund Phase I clinical development of VAC2 in non-small cell lung cancer. CRUK is responsible, at its own cost, for manufacturing clinical grade VAC2 and for carrying out the Phase I clinical trial of VAC2. Patient enrollment began in June 2018 and four patients have been enrolled to date.

Upon completion of the Phase I clinical trial, we will have an exclusive option to acquire the data generated in the trial and conduct further development of VAC2. The reacquisition fee is approximately $1.6 million with additional milestone fees based upon initiation of a Phase III study and the filing for regulatory approval, as well as mid-single-digit royalty payments on sales of commercial products. If BioTime declines this option, CRUK will then have an option to obtain a license to BioTime’s intellectual property to continue the development and commercialization of VAC2 and related products in exchange to BioTime for a revenue share of development and partnering proceeds. In connection with the CRUK Agreement, we sublicensed to CRUK for use in the clinical trials and product manufacturing process certain patents we licensed or sublicensed to third parties. We will also be obligated to pay to those licensors and sublicensors upon the achievement of various milestones and to pay royalties on sales of products if VAC2 is successfully developed and commercialized.

The allogenic VAC2 program was preceded by the autologous VAC1 program which isolated dendritic cells from a patient’s own blood, modified those cells to stimulate immune responses to telomerase and then administered those cells back to the patient as a therapeutic modality. VAC1 was studied for the treatment of Acute Myeloid Leukemia (“AML”), the most common form of acute leukemia in adults. A Phase II clinical trial of VAC1 demonstrated that it successfully manufactured and released in 24 out of the 33 patients enrolled in the study. Twenty-one patients received VAC1 in the study, including 19 in clinical remission and two in early relapse. VAC1 was found to have a favorable safety and tolerability profile. Asterias performed follow-up data collection on the 19 patients treated while in complete remission to determine the long-term effects of the VAC1 administration on remission duration and disease-free survival.

VAC1 utilized an autologous approach where the cellular vaccine needs to be created specifically for each patient. This results in a longer time to administer the therapy as compared to the allogeneic approach of the VAC2 program which is disadvantageous in advanced cancer patients given the rapidity of disease progression. The VAC1 program serves as an effective and encouraging proof of concept behind our approach to dendritic cell vaccines targeting telomerase, which is the backbone of the VAC2 program.

Cell/Drug Delivery Technology - HyStem^®

HyStem is a patented biomaterial which mimics naturally occurring extracellular matrix, the structural network of molecules surrounding cells in organs and tissues essential to cellular function and tissue structure. Many tissue engineering and regenerative cell-based therapies will require the delivery of therapeutic cells in a matrix or scaffold for accurate anatomical placement, cell retention, and engraftment. HyStem is a unique hydrogel that has been shown to support cellular attachment and survival. Current research at leading medical institutions has shown that HyStem is compatible with a wide variety of cells and tissue types including brain, bone, skin, cartilage, vascular and heart tissues.

The patented technology underlying our HyStem hydrogel products in development, such as Renevia, was developed at the University of Utah and has been exclusively licensed to us for human therapeutic uses. The HyStem technology is based on a unique thiol cross-linking chemistry to prepare hyaluronan-based hydrogels. Since the first published report in 2002, there have been over 200 academic scientific publications supporting the biocompatibility of thiol cross-linked hyaluronan-based hydrogels and their applications as medical devices and in cell culture, tissue engineering, and animal models of cell-based therapies.

Due to the unique cross-linking chemistry, HyStem hydrogels have the ability to be formulated with cells and can be injected or applied as a gel, allowing it to conform to a cavity or space. This property offers several distinct advantages over other hydrogels, including the possibility of combining bioactive materials with the hydrogel at the point of use.

Renevia^®

Renevia, our lead facial aesthetics product candidate, is being developed as a potential treatment for facial lipoatrophy. Lipoatrophy is the loss of fat tissue and may be caused by several factors, including trauma, aging or drug side effects, such as those that can occur from certain drugs used to treat patients with human immunodeficiency virus (HIV). Renevia consists of our HyStem hydrogel combined with the patient’s own fat or adipose progenitor cells. As a potential alternative to traditional fat transfer procedures, Renevia is designed to mimic the naturally-occurring extracellular matrix in the body and to provide a 3-D scaffold that supports effective cell transplant, retention, engraftment and metabolic support. Renevia is being developed with the goal of providing a natural looking and feeling, long-lasting option for facial volume restoration.

In 2017, Renevia met the primary endpoint of implanted volume retention in a pivotal clinical trial in Europe to assess its safety and effectiveness in restoring facial volume in patients whose subcutaneous fat, or adipose tissue, has been lost due to a side effect of certain drugs used to treat patients with HIV. In this clinical trial, Renevia treated patients retained approximately 100% of transplanted volume at six months (p<0.001), based on 3-D volume measurement of the implanted area, achieving the primary endpoint of the study. In addition to achieving the primary endpoint, treated patients retained an average 70% of the transplanted volume at 12 months and those patients that were observed after 18 months retained 64% of the transplanted volume. Based on these clinical trial results, in March 2018 we filed for marketing authorization in the European Union (EU) for certain forms of facial lipoatrophy. We anticipate feedback from the regulatory agency in the second half of 2019. If approved, we will seek to identify an external partner for commercialization of Renevia in Europe.

Research Programs

Vision restoration

In 2017, we expanded our ophthalmology portfolio by acquiring exclusive global rights to technology that allows the generation of three-dimensional human retinal tissue derived from human pluripotent cells. This tissue contains all the cell types and layers of the human retina and has shown evidence of functional integration in proof of concept animal models for advanced retinal degeneration. The technology is being developed to potentially treat or prevent a variety of retinal degenerative diseases and injuries. In 2017, the National Institutes of Health (NIH) awarded us a grant of up to $1.56 million to further develop this innovative, next generation vision restoration program for retinal diseases and injuries, which severely impact the quality of life for millions of people who have limited treatment options.

Demyelination

OPC1 exhibits multiple reparative properties that have broad applicability to neurological injury and disease, particularly as a treatment for demyelination. Current research efforts are focused on the development of OPC1 as a candidate treatment for ischemic stroke and multiple sclerosis (“MS”), two severely debilitating conditions that: 1) afflict a large number of individuals (approximately 692,000 stroke cases and 10,000 new MS cases per year in the U.S. (www.cdc.gov/stroke, www.nationalmssociety.org)), 2) lack any form of reparative treatment options, and 3) for which demyelination is a central component to their pathology.

To develop OPC1 as a treatment for MS, initial proof-of-concept efficacy data has been demonstrated in collaboration with Yale University using a non-human primate model of MS. Results of this study showed OPC1 engraftment that was associated with substantial remyelination of the lesioned primate spinal cord up to 5 months post-treatment. These data are in preparation for scientific publication. Subsequently, we initiated a collaboration with University of California Irvine to assess OPC1 efficacy in additional mouse models of MS that better recapitulate the autoimmune components of the disease. Preliminary results indicate that in addition to OPC1’s capacity to remyelinate the lesioned spinal cord, the cells may also help stimulate proliferation of a distinct class of immune cells known as regulatory T cells that can help reduce or eliminate autoimmunity. We intend to use the anticipated in vivo efficacy data obtained from the collaboration to seek additional non-dilutive funding for further development of OPC1 as a treatment for MS.

For ischemic stroke, initial proof-of-concept efficacy data for OPC1 has been demonstrated in a collaborative study with the University of California Los Angeles using a mouse model of white matter ischemic stroke. Results of this study demonstrated that within the stroke injury site, OPC1 cells engrafted, reduced lesion formation and inflammation, and increased myelination, culminating in improved functional recovery. We have since initiated a second preclinical study in collaboration with the University of South Florida to test two different doses of OPC1 in a rat model of ischemic subcortical and white matter stroke. We expect this study to be completed in the second quarter of 2019. We intend to use the results of these combined studies to seek additional funding and guide further preclinical development of OPC1 as a treatment for ischemic stroke.

Products for Orthopedic Indications

We also have research programs targeted at orthopedic indications. ReGlyde™ is another HyStem product in preclinical development as a device for viscosupplementation and as a platform for intraarticular drug delivery in osteoarthritis (OA). The viscosupplementation device program aims to administer ReGlyde directly into OA affected joints to provide joint lubrication to reduce pain and improve quality of life. The drug delivery program seeks to enable the sustained release of therapeutics in affected OA joints to help slow or reverse disease progression, in addition to alleviating pain and improving joint function.

These orthopedic programs are currently being conducted by OrthoCyte Corporation, an entity of which we own 99.8% of its outstanding capital stock.

Subsidiaries and affiliates:

The following table shows the companies in which we have a direct or indirect ownership, their respective principal fields of business, our percentage ownership as of March 11, 2019, and the country where their principal business is located:

PATENTS AND TRADE SECRETS

We rely primarily on patents and contractual obligations with employees and third parties to protect our proprietary rights. We have sought, and intend to continue to seek, appropriate patent protection for important and strategic components of our proprietary technologies by filing patent applications in the U.S. and certain foreign countries. There are no assurances that any of our intellectual property rights will guarantee protection or market exclusivity for our products and product candidates. We also use license agreements both to access technologies developed by other companies and universities and to convey certain intellectual property rights to others. Our financial success will be dependent, in part, on our ability to obtain commercially valuable patent claims, to protect and enforce our intellectual property rights, and to operate without infringing upon the proprietary rights of others if we are unable to obtain enabling licenses.

As of February 28, 2019, we owned or controlled or licensed directly or through our subsidiaries approximately 850 patents and pending patent applications worldwide including more than 190 issued or pending U.S. patents or patent applications. This number also includes the over 135 patents and applications licensed from WARF.

OpRegen

We and our subsidiary, Cell Cure, have issued patents that will provide protection to OpRegen. The issued patents have expiry dates ranging from 2025 to 2033. We and our subsidiary, Cell Cure also have pending applications that if issued, will provide protection to OpRegen and will have expiry dates ranging from December 2025 to December 2038.

Cell Cure was a party to two pending opposition proceedings in the European Patent Office (EPO) involving EP Patent Numbers 2147094 (issued 08-Oct-2014) and 2554661 (issued 19-Nov-2014), both entitled, “Stem Cell-Derived Retinal Pigment Epithelial Cells”. The Oral Proceedings took place on March 16, 2017 and March 17, 2017, respectively. Both patents were upheld by the EPO. The decisions were both appealed and the detailed grounds for appeal were due on September 9, 2017 and September 11, 2017, respectively, however, both appeals were withdrawn prior to those dates and the patents will be issued as amended in the opposition proceedings. Both patents relate to our OpRegen product and provide protection until April 2028. There are additional patent applications pending that if issued will provide further protection for OpRegen.

Renevia

We have patent protection for Renevia with expiry dates ranging from May 2023 to August 2027, and pending applications that if issued, will provide protection to Renevia with expiry dates ranging from December 2024 to June 2038.

OPC1

The patent rights relevant to neural cells, such as oligodendrocyte progenitor cells, include various patent families acquired from Geron that are directed to the differentiation of pluripotent stem cells (including hES cells) into various neural cell types, as well as various culture and purification methods. These patent rights also include rights licensed from the Regents of the University of California. There are issued patents in the United States, Australia, Canada, Europe, Japan, China, Hong Kong, India, Korea, Singapore and Israel. Additionally, there are five new pending patent families owned by us directed to improved methods of producing oligodendrocyte progenitor cells, oligodendrocyte progenitor cell compositions and methods of treatment of spinal cord injury and stroke using oligodendrocyte progenitor cells. The stroke family is jointly owned with the Regents of the University of California; the other four new pending families are solely owned by Asterias. The expiration dates of the patents acquired from Geron and in-licensed from the Regents of the University of California will be within 2021 to 2030. The potential expiry dates of the four new patent families with applications pending will be within 2036 to 2038. The commercial success of OPC1 product depends, in part, upon our ability to exclude competition for this product with the existing patent portfolio, regulatory exclusivity, or a combination of both.

VAC1 and VAC2

The patent rights relevant to dendritic cells include various patent families acquired from Geron or in-licensed from third parties that are directed to the differentiation of pluripotent stem cells (including hES cells) into hematopoietic progenitor cells and immature and mature dendritic cells. In addition, these patent rights include a patent family with claims directed to immunogenic compositions comprising antigen-presenting dendritic cells and methods of eliciting an anti-telomerase immune response in a subject by administering to the subject such compositions. There are issued patents in the United States, Australia, Europe, Canada, China, Hong Kong, Japan, Korea, Israel and Singapore. The expiration dates of the patents acquired from Geron and in-licensed to us range from 2019 to 2029. Additionally, there is a new pending patent family owned by us with claims directed to immunotherapeutic compositions comprising immunogenic peptides and methods of eliciting a cellular mediated immune response in a subject, with a provisional patent application filed in 2017. The potential expiry date of the new patent family with a pending provisional application will be in 2038. The commercial success of VAC1 and VAC2 products depends, in part, upon our ability to exclude competition in these products with this patent portfolio, regulatory exclusivity, or a combination of both.

In addition, we have issued patents in the Unites States and various other jurisdictions for producing cardiomyocytes, pancreatic islet cells, hepatocytes, chondrocytes, and osteoblasts. The expiration dates of these patents range from 2020 to 2032.

General Risks Related to Obtaining and Enforcing Patent Protection

There is a risk that any patent applications that we file and any patents that we hold or later obtain could be challenged by third parties and be declared invalid or infringing on third party claims. Litigation, interferences, oppositions, inter partes reviews or other proceedings are, have been and may in the future be necessary in some instances to determine the validity and scope of certain of our proprietary rights, and in other instances to determine the validity, scope or non-infringement of certain patent rights claimed by third parties to be pertinent to the manufacture, use or sale of our products. We may also face challenges to our patent and regulatory protections covering our products by third parties, including manufacturers of generics and biosimilars that may choose to launch or attempt to launch their products before the expiration of our patent or regulatory exclusivity. Litigation, interference, oppositions, inter partes reviews, administrative challenges or other similar types of proceedings are unpredictable and may be protracted, expensive and distracting to management. The outcome of such proceedings could adversely affect the validity and scope of our patent or other proprietary rights, hinder our ability to manufacture and market our products, require us to seek a license for the infringed product or technology or result in the assessment of significant monetary damages against us that may exceed any amounts that we may accrue on our financial statements as a reserve for contingent liabilities. An adverse determination in a judicial or administrative proceeding or a failure to obtain necessary licenses could prevent us from manufacturing or selling our products. Furthermore, payments under any licenses that we are able to obtain would reduce our profits derived from the covered products and services.

The enforcement of patent rights often requires litigation against third-party infringers, and such litigation can be costly to pursue. Even if we succeed in having new patents issued or in defending any challenge to issued patents, there is no assurance that our patents will be comprehensive enough to provide us with meaningful patent protection against our competitors.

In addition to relying on patents, we rely on trade secrets, know-how, and continuing technological advancement to maintain our competitive position. We have entered into intellectual property, invention, and non-disclosure agreements with our employees, and it is our practice to enter into confidentiality agreements with our consultants. There can be no assurance, however, that these measures will prevent the unauthorized disclosure or use of our trade secrets and know-how, or that others may not independently develop similar trade secrets and know-how or obtain access to our trade secrets, know-how, or proprietary technology.

EMPLOYEES

As of December 31, 2018, we had 79 employees, of which 36 are BioTime employees and 43 are employees of our subsidiaries, including foreign subsidiaries, and of which 76 are employed on a full-time basis and three are employed on a part-time basis. 17 full-time employees hold Ph.D. degrees in one or more fields of science. None of our employees are covered by a collective bargaining agreement. In connection with our updated corporate objectives with a greater focus on clinical development, we reduced our worldwide headcount by 16 employees through employee terminations and the closing of vacant positions since December 31, 2017.

MANUFACTURING

Cell Products

We established an innovative cell therapy manufacturing facility in the Bio Park on the campus of the Hadassah University Hospital in Jerusalem, Israel. The facility includes process development laboratories and a state-of-the-art, cGMP manufacturing facility. It is designed and equipped to enable simultaneous GMP processes and to produce OpRegen and a range of cell therapy products for human use in clinical trials as well as at a scale suitable for commercial launch. We intend to transfer all cGMP manufacturing processes, including the establishment of H1 cell banks and the OPC1 process development and manufacturing for clinical studies, to this facility.

HyStem Hydrogel Products

We hold a California Device Manufacturing License and are registered with the FDA as a Device Manufacturer in support of our 510K cleared product, Premvia. We have ISO 13485:2003 certification for the design, development, manufacture, and distribution of hydrogels for therapeutic delivery applications. Although we hold these certifications, licenses, and registrations, all our HyStem® Hydrogel product manufacturing occurs at contract facilities located in Pennsylvania and California. Our contractors have the necessary registrations and certifications to perform this manufacturing.

Plasma Volume Expanders

BioTime has licensed Hextend rights to Hospira, Inc., a subsidiary of Pfizer, Inc., for the United States and to CJ Healthcare for South Korea. CJ Healthcare manufactures, markets and distributes our synthetic blood volume expander solution Hextend for use in the respective geographies. We receive royalties on the sales of Hextend.

RAW MATERIALS

Except as described below, we believe the raw materials and supplies that we require to manufacture our products, as well as the raw materials that we require for our research and development operations relating to our product candidates and products, are widely available from numerous suppliers and are generally considered to be generic materials and supplies. Except as described below, we do not rely on a single supplier for the current production of any product in development or for our research and development operations relating to our products.

We usually contract with suppliers to purchase the materials required for the research and development operations of our products. All the materials required in the research and development operations of our products are off-the-shelf pharmaceutical products; special production or special requirements are not required to order these materials. We have no written agreements with most of our suppliers. Rather, we submit purchase orders to our suppliers from time to time and as required.

Most of the ingredients in the HyStem products we are developing are readily obtainable from multiple sources. Two critical ingredients, gelatin and sodium hyaluronate, are readily available from multiple sources but would require significant testing in order to qualify new vendors as sources of those ingredients for our products.

LICENSED TECHNOLOGY AND PRODUCT DEVELOPMENT AGREEMENTS

BioTime has obtained the right to use technology that we believe has great potential in our product development efforts, and that may be useful to other companies that are engaged in the research and development of products for human therapeutic and diagnostic use.

HyStem Hydrogel Technology

In February 2006, we acquired an exclusive worldwide license from the University of Utah to use certain patents in the production and sale of hydrogel products, including our HyStem products, excluding certain veterinary and animal health uses. Our licensed field of use includes, but is not limited to, all human pharmaceutical and medical device applications, all tissue engineering and regenerative medicine uses, and all research applications.

Under the license agreement, we will pay a 3% royalty on sales of products and services performed that utilize the licensed patents. We are obligated to pay minimum royalties to the extent that actual royalties on products sales and services utilizing the patents are less than the minimum royalty amount. The minimum royalty amounts are $30,000 per annum during the term of the license agreement. We will also pay the University of Utah 30% of any sublicense fees or royalties received under any sublicense of the licensed patents.

We will also pay a $225,000 milestone fee within six months after the first sale of a “tissue engineered product” that utilizes a licensed patent. A tissue engineered product is defined as living human tissues or cells on a polymer platform, created at a place other than the point-of-care facility, for transplantation into a human patient.

We agreed to pay an additional license fee for the additional rights licensed to us during August 2012, and the costs of filing, prosecuting, enforcing and maintaining the patents exclusively licensed to us, and a portion of those costs for patents that have been licensed to a third party for a different field of use.

We may, under certain circumstances, be obligated to sublicense to one or more third parties, on commercially reasonable terms to be negotiated between us and each prospective sublicensee, or re-grant to the University of Utah, rights to use the licensed patents for products and services outside the general industry in which we or any of our affiliates or sublicensees is then developing or commercializing, or has plans to develop or commercialize, a product using the licensed technology.

Hadasit Research and License Agreement

In June 2017, Cell Cure entered into a Second Amended and Restated License Agreement (the “Hadasit License Agreement”) with Hadasit Medical Research Services and Development Ltd. (“Hadasit”), the commercial arm and a wholly-owned subsidiary of Hadassah Medical Organization. Pursuant to the Hadasit License Agreement, Hadasit granted Cell Cure an exclusive, worldwide, royalty bearing license (with the right to grant sublicenses) in its intellectual property portfolio of materials and technology related to human stem cell derived photoreceptor cells and retinal pigment epithelial cells (the “Licensed IP”), to use, commercialize and exploit any part thereof, in any manner whatsoever in the fields of the development and exploitation of (i) human stem cell derived photoreceptor cells, solely for use in cell therapy for the diagnosis, amelioration, prevention and treatment of eye disorders, and (ii) human stem cell derived retinal pigment epithelial cells, solely for use in cell therapy for the diagnosis, amelioration, prevention and treatment of eye disorders.

As consideration for the Licensed IP, Cell Cure paid a small one-time lump sum payment for reimbursement of intellectual property related expenses and will pay a royalty in the mid-single digits of net sales from sales of Licensed IP by any invoicing entity, and a royalty of 21.5% on sublicensing receipts. In addition, Cell Cure will pay Hadasit an annual minimal non-refundable royalty, which will become due and payable the first January 1 following the completion of services to Cell Cure by a research laboratory.

Cell Cure agreed to pay Hadasit non-refundable milestone payments upon the recruitment of the first patient for the first Phase IIB clinical trial, upon the enrollment of the first patient in the first Phase III clinical trials, upon delivery of the report for the first Phase III clinical trials, upon the receipt of an NDA or marketing approval in the European Union, whichever is the first to occur, and upon the first commercial sale in the United States or European Union, whichever is the first to occur. Such milestones, in the aggregate, may be up to $3.5 million. As of December 31, 2018, Cell Cure had not accrued any of these milestone payments.

The Hadasit License Agreement terminates upon the expiration of Cell Cure’s obligation to pay royalties for all licensed products, unless earlier terminated. In addition, the Hadasit License Agreement may be terminated by (i) Hadasit if, among other reasons, Cell Cure fails to continue the clinical development of the Licensed IP or fails to take actions to commercialize or sell the Licensed IP over any consecutive 12 month period, and (ii) by either party for (a) a material breach which remains uncured following a cure period, or (b) the granting of a winding-up order in respect of the other party, or upon an order being granted against the other party for the appointment of a receiver or a liquidator in respect of a substantial portion of such other party’s assets. The Hadasit License Agreement also contains customary indemnification obligations of Cell Cure.

License Agreement with University of California

Geron assigned to Asterias its exclusive license agreement with The Regents of the University of California dated June 2018 (the “UC License Agreement”) for patents covering a method for directing the differentiation of pPS cells to glial-restricted progenitor cells that generate pure populations of oligodendrocytes for remyelination and treatment of spinal cord injury. Under the UC License Agreement, we have an exclusive worldwide license under such patents, including the right to grant sublicenses, to create products for biological research, drug screening, and human therapy using the licensed patents.

Under the UC License Agreement, we will pay the university a royalty of 1% from sales of products that are covered by the licensed patent rights, and a minimum annual royalty of $5,000 starting in the year in which the first sale of a product covered by any licensed patent rights occurs and continuing for the life of the applicable patent right under the agreement. Under certain conditions, we will pay the university 7.5% of any proceeds, excluding debt financing and equity investments, and certain reimbursements, that we receive from sublicensees.

The UC License Agreement terminates on the expiration of the last-to-expire of the university’s issued licensed patents. If no further patents covered by the UC License Agreement are issued, it will terminate in 2024. The university may terminate the UC License Agreement if we breach it, and we can terminate it upon 60 days’ notice.

World-Wide Non-Exclusive WARF License

In October 2013, Asterias entered into a Non-Exclusive License Agreement with the Wisconsin Alumni Research Foundation (“WARF”) under which Asterias was granted a worldwide non-exclusive license under certain WARF patents and WARF-owned embryonic stem cell lines to develop and commercialize therapeutic, diagnostic and research products. The licensed patents include patents covering methods for growth and differentiation of primate embryonic stem cells. The licensed stem cell lines include the H1, H7, H9, H13, and H14 hES cell lines.

In consideration of the rights licensed to us, we have agreed to pay WARF an upfront license fee and have agreed to additional payments upon the attainment of specified clinical development milestones, royalties on sales of commercialized products, and, subject to certain exclusions, a percentage of any payments that we may receive from any sublicenses that we may grant to use the licensed patents or stem cell lines.

The license agreement will terminate with respect to licensed patents upon the expiration of the last licensed patent to expire; with respect to the licensed stem cell lines, the license agreement will remain in force until terminated by either party in accordance with the termination provisions. We may terminate the license agreement at any time by giving WARF prior written notice. WARF may terminate the license agreement if: (1) payments of earned royalties, once begun, cease for a specified period of time, (2) we and any third parties collaborating or cooperating with us in the development of products using the licensed patents or stem cell lines fail to spend a specified minimum amount on research and development of products relating to the licensed patents or stem cell lines for a specified period of time, or (3) we breach the license agreement or become bankrupt or insolvent or if any of the licensed patents or stem cell lines are offered to creditors.

We will indemnify WARF and certain other designated affiliated entities from liability arising out of or relating to the death or injury of any person or damage to property due to the sale, marketing, use, or manufacture of products that are covered by the licensed patents, or licensed stem cells, or inventions or materials developed or derived from the licensed patents or stem cell lines.

Royalty Agreement with Geron

In connection with Asterias’s acquisition of Geron’s stem cell assets, in October 2013, we entered into a royalty agreement with Geron (the “Royalty Agreement”) pursuant to which we agreed to pay Geron a 4% royalty on net sales (as defined in the Royalty Agreement) by us or any of our affiliates or sales agents of any products that we develop and commercialize that are covered by the patents Geron contributed to us. In the case of sales of such products by a person other than us or one of our affiliates or sales agents, we will be required to pay Geron 50% of all royalties and cash payments received by us or by our affiliate in respect of a product sale. Royalty payments will be subject to proration in the event that a product covered by a patent acquired from Geron is sold in combination with another product that is not covered by a patent acquired from Geron. The Royalty Agreement will terminate at the expiration or termination date of the last issued patent contributed by Geron under the Royalty Agreement. We estimate that the latest patent expiration date will be in 2032.

AgeX License Agreement

Concurrently with our contribution of assets to AgeX in August 2017, we and AgeX entered into a license agreement pursuant to which we licensed to AgeX, with rights to sublicense, certain intellectual property, including patents and patent applications and know-how for use in the development, manufacture and commercialization of products or services for the prevention, treatment, amelioration, diagnosis or monitoring of all human and non-human animal diseases and conditions except for the field of medical products, devices and services for the reserved BioTime fields of orthopedic, ophthalmic and medical aesthetic uses. In addition, we retained an option right to license, on terms to be negotiated, certain patents in research, development, manufacturing and commercialization of treatments in the reserved BioTime fields. The licensed patents and know-how relate generally to (a) our PureStem human embryonic progenitor cell lines, and (b) telomere length and DNA quality control analysis in pluripotent stem cells.

The BioTime patent rights licensed to AgeX are exclusive and worldwide except for existing third-party licenses, and for medical products, devices, and services related to tendon. AgeX also received an option to license certain BioTime retained patent rights outside of orthopedic indications unless a license grant would compete with a BioTime program or products in the retained BioTime field.

We also agreed to license or sublicense to AgeX certain additional patents and patent rights and know-how relating to BioTime HyStem hydrogel technology, human embryonic progenitor cell technology, and human pluripotent stem cell lines and technology for use outside the fields reserved to BioTime or in the case of certain sublicense rights in fields previously licensed to third parties.

GOVERNMENT REGULATION

Government authorities at the federal, state and local level, and in other countries, extensively regulate among other things, the development, testing, manufacture, quality, approval, safety, efficacy, distribution, labeling, packaging, storage, record keeping, marketing, import/export and promotion of drugs, biologics, and medical devices. Laboratories performing diagnostic tests such as those being developed by OncoCyte are also subject to regulation at both the federal and state level. Authorities also heavily regulate many of these activities for human cells, tissues, and cellular and tissue-based products or HCT/Ps.

FDA and Foreign Regulation of Therapeutic Products

The FDA and foreign regulatory authorities will regulate our proposed products as drugs, biologicals, or medical devices, depending upon such factors as the use to which the product will be put, the chemical composition, and the interaction of the product with the human body. In the United States, the FDA regulates drugs and biologicals under the Federal Food, Drug and Cosmetic Act, or FDCA, the Public Health Service Act, or PHSA, and implementing regulations. In addition, establishments that manufacture human cells, tissues, and HCT/Ps are subject to additional registration and listing requirements, including current good tissue practice regulations. Certain cell therapy proposed products will be reviewed by the FDA staff in its Center for Biologics Evaluation and Research (“CBER”) Office of Cellular, Tissue and Gene Therapies.

Our domestic human drug and biological products will be subject to rigorous FDA review and approval procedures. After testing in animals to evaluate the potential efficacy and safety of the product candidate, an investigational new drug (“IND”) submission must be made to the FDA to obtain authorization for human testing. Extensive clinical testing, which is generally done in three phases, must then be undertaken to demonstrate optimal use, safety, and efficacy of each product in humans. Each clinical study is conducted under the auspices of an independent Institutional Review Board (“IRB”). The IRB will consider, among other things, ethical factors, the safety of human subjects, and the possible liability of the institution.

Phase I clinical trials are conducted in a small number of healthy volunteers or volunteers with the target disease or condition to assess safety. Phase II clinical trials are conducted with groups of patients afflicted with the target disease or condition in order to determine preliminary efficacy, optimal dosages and expanded evidence of safety. In some cases, an initial trial is conducted in diseased patients to assess both preliminary efficacy and preliminary safety, in which case it is referred to as a Phase I/II trial. Phase III trials are large-scale, multi-center, comparative trials and are conducted with patients afflicted with the target disease or condition in order to provide enough data to demonstrate the efficacy and safety required by the FDA. The FDA closely monitors the progress of each of the three phases of clinical testing and may, at its discretion, re-evaluate, alter, suspend, or terminate the clinical trial based upon the data which have been accumulated to that point and its assessment of the risk/benefit ratio to the intended patient population. All adverse events must be reported to the FDA. Monitoring of all aspects of the study to minimize risks is a continuing process.

No action can be taken to market any therapeutic product in the U.S. until an appropriate New Drug Application (“NDA”) or Biologics License Application (BLA) has been approved by the FDA. Submission of the application is not a guarantee that the FDA will find it complete and accept it for filing. If an application is accepted for filing, following the FDA’s review, the FDA may grant marketing approval, request additional information or deny the application if it determines that the application does not provide an adequate basis for approval. FDA regulations also restrict the export of therapeutic products for clinical use prior to FDA approval. To date, the FDA has not granted marketing approval to any pluripotent stem-based therapeutic products and it is possible that the FDA or foreign regulatory agencies may subject our product candidates to additional or more stringent review than drugs or biologicals derived from other technologies.

The FDA offers several programs to expedite development of products that treat serious or life-threatening illnesses and that provide meaningful therapeutic benefits to patients over existing treatments. A drug is eligible for designation as a regenerative medicine advanced therapy (“RMAT,” formerly known as “Regenerative Advanced Therapy”) if: the drug is a regenerative medicine therapy, which is defined as a cell therapy, therapeutic tissue engineering product, human cell and tissue product, or any combination product using such therapies or products, except for those regulated solely under certain other sections; the drug is intended to treat, modify, reverse, or cure a serious or life-threatening disease or condition; and preliminary clinical evidence indicates that the drug has the potential to address unmet medical needs for such disease or condition. Some of our current and future products may be eligible for RMAT designation. RMAT designation allows for similar benefits as the breakthrough therapy designation. There is no assurance that the FDA will grant RMAT status to any of our product candidates.

Certain Medical Devices

Obtaining regulatory approval of Renevia or a similar implantable matrix for tissue transplant or stem cell therapy in Europe will require the preparation of a design dossier containing details on the product manufacturing and production methods, analytical controls to assure that the product meets its release specification, data from analytical assay and process validations, ISO 10993 biocompatibility testing, as well as pre-clinical and clinical safety and efficacy data. Completion of the manufacturing, analytical, biocompatibility, and clinical trials represents a majority of the expenses associated with the regulatory application process in Europe.

Combination Products

If we develop any products that are used with medical devices, they may be considered combination products, which are defined by the FDA to include products comprised of two or more regulated components or parts such as a biologic and a device. For example, our HyStem hydrogel products such as Renevia may be used to administer one or more pluripotent stem cell-based therapy products. When regulated independently, biologics and devices each have their own regulatory requirements. However, the regulatory requirements for a combination product comprised of a biologic administered with a delivery device can be more complex, because in addition to the individual regulatory requirements for each component, additional combination product regulatory requirements may apply. There is an Office of Combination Products at the FDA that coordinates the review of such products and determines the primary mode of action of a combination product. The definition and regulatory requirements for combination products may differ significantly among countries in which we may seek approval of our product candidates.

FDA Regulation of Manufacturing

The FDA regulates the manufacturing process of pharmaceutical products, human tissue and cell products, and medical devices, requiring that they be produced in compliance with cGMP. See “Manufacturing.” The FDA regulates and inspects equipment, facilities, laboratories and processes used in the manufacturing and testing of products prior to providing approval to market products. If after receiving approval from the FDA, a material change is made to manufacturing equipment or to the location or manufacturing process, additional regulatory review may be required. The FDA also conducts regular, periodic visits to re-inspect the equipment, facilities, laboratories and processes of manufacturers following an initial approval. If, as a result of those inspections, the FDA determines that that equipment, facilities, laboratories or processes do not comply with applicable FDA regulations and conditions of product approval, the FDA may seek civil, criminal or administrative sanctions and/or remedies against the manufacturer, including suspension of manufacturing operations. Issues pertaining to manufacturing equipment, facilities or processes may also delay the approval of new products undergoing FDA review.

FDA Regulation of Advertising and Product Promotion

The FDA also regulates the content of advertisements used to market pharmaceutical and biological products. Claims made in advertisements concerning the safety and efficacy of a product, or any advantages of a product over another product, must be supported by clinical data filed as part of an NDA, a BLA, or a pre-market notification or pre-market approval application for a medical device (“PMA”), or an amendment to an NDA, a BLA, or a pre-market notification or PMA, and must be consistent with the FDA approved labeling and dosage information for that product.

Foreign Regulation

Sales of pharmaceutical products outside the U.S. are subject to foreign regulatory requirements that vary widely from country to country. Even if FDA approval has been obtained, approval of a product by comparable regulatory authorities of foreign countries must be obtained prior to the commencement of marketing the product in those countries. The time required to obtain such approval may be longer or shorter than that required for FDA approval.

Federal Funding of Research

The United States government and its agencies previously refused to fund research which involves the use of human embryonic tissue. President Bush issued Executive Orders on August 9, 2001 and June 20, 2007 that permitted federal funding of research on hES cells using only the limited number of hES cell lines that had already been created as of August 9, 2001. On March 9, 2009, President Obama issued an Executive Order rescinding President Bush’s August 9, 2001 and June 20, 2007 Executive Orders. President Obama’s Executive Order also instructed the NIH to review existing guidance on human stem cell research and to issue new guidance on the use of hES cells in federally funded research, consistent with the new Executive Order and existing law. In accordance with this Executive Order and existing law, the NIH adopted guidelines that went into effect July 7, 2009. The central focus of the guidelines was to assure that hES cells used in federally funded research were derived from human embryos that were created for reproductive purposes, were no longer needed for this purpose, and were voluntarily donated for research purposes with the informed written consent of the donors. Those hES cells that were derived from embryos created for research purposes rather than reproductive purposes, and other hES cells that were not derived in compliance with the guidelines, were and remain ineligible for use in federally funded research.

In addition to President Obama’s Executive Order, bipartisan legislation was introduced on June 19, 2013 in the U.S. House of Representatives which would allow for Federal funding of hES research. The House bill is similar to one that was previously approved by both Houses of Congress but vetoed by President Bush. The House bill provides that hES cells would be eligible for use in research conducted or supported by federal funding if the cells meet each of the following guidelines: (1) the stem cells were derived from human embryos that were created using in vitro fertilization for reproductive purposes, and are no longer needed by the individuals seeking such treatment, and (2) the individuals seeking reproductive treatment donated the embryos to be used for research purposes with written and voluntary informed consent and without receiving any financial or other inducements to make the donation. The House bill would authorize the Department of Health and Human Services (“HHS”) and the NIH to adopt further guidelines applicable to the conduct or support of human stem cell research consistent with this proposed legislation.

Although no legislation permitting Federal funding of hES research has been advanced by Congress, the scope of the Dickey-Wicker Amendment, which prohibits the use of federal funding for activity related to the harm or destruction of a human embryo, was determined by the U.S. Court of Appeals for the D.C. Circuit not to preclude funding of hES research. With the Supreme Court declining review of the appeal in 2013, the ruling has been allowed to stand. Additionally, the 21st Century Cures Act, signed into law in 2016, included provisions facilitating timely FDA review and approval of regenerative cell therapies enabled by stem cell therapy research, albeit limited to adult stem cells.

California State Regulations

The state of California has adopted legislation and regulations that require institutions that conduct stem cell research to notify, and in certain cases, including research involving the creation or use of human embryos, obtain approval in writing from a Stem Cell Research Oversight Committee (“SCRO Committee”) before conducting the research. Under certain California regulations, all hES cell lines that will be used in our research must be acceptably derived.

We also comply with certain California regulations that require certain records to be maintained with respect to stem cell research and the materials used.

We have formed a SCRO Committee which reviews each of BioTime’s projects that involve the use of pluripotent stem cells. The Committee reviews and confirms that we are using only hES cell lines that have been acceptably derived and that the research conducted using these cell lines is both scientifically and ethically justified under existing California regulations. The OpRegen program has been reviewed by the SCRO Committee and we believe that we comply with applicable federal and state guidelines. The hES cell lines that we use are all on the NIH registry of lines that have been reviewed and meet standards for federal funding grants.

Health Insurance Portability and Accountability Act

Under the Health Insurance Portability and Accountability Act (“HIPAA”), the HHS has issued regulations to protect the privacy and security of protected health information. HIPAA also regulates standardization of data content, codes and formats used in health care transactions and standardization of identifiers for health plans and providers. Penalties for violations of HIPAA regulations include civil and criminal penalties.

Federal and State Fraud and Abuse Laws

A variety of federal and state laws prohibit fraud and abuse. These laws are interpreted broadly and enforced aggressively by various state and federal agencies, including the Centers for Medicare & Medical Services (CMS), the Department of Justice, the Office of Inspector General for HHS, and various state agencies. In addition, the Medicare and Medicaid programs increasingly use a variety of contractors to review claims data and to identify improper payments as well as fraud and abuse. These contractors include Recovery Audit Contractors, Medicaid Integrity Contractors and Zone Program Integrity Contractors. In addition, CMS conducts Comprehensive Error Rate Testing audits, the purpose of which is to detect improper Medicare payments. Any overpayments identified must be repaid unless a favorable decision is obtained on appeal. In some cases, these overpayments can be used as the basis for an extrapolation, by which the error rate is applied to a larger universe of claims, and which can result in even higher repayments.

The federal Anti-Kickback Statute prohibits, among other things, knowingly and willfully offering, paying, soliciting, receiving, or providing remuneration, directly or indirectly, to induce or in return for either the referral of an individual, or the furnishing, recommending, or arranging for the purchase, lease or order of any health care item or service reimbursable, in whole or in part, under a federal health care program. The definition of “remuneration” has been broadly interpreted to include anything of value, including gifts, discounts, credit arrangements, payments of cash, ownership interests and providing anything at less than its fair market value. Recognizing that the federal Anti- Kickback Statute is broad and may technically prohibit many innocuous or beneficial arrangements within the health care industry, the Office of Inspector General for HHS has issued a series of regulatory “safe harbors.” These safe harbor regulations set forth certain requirements that, if met, will assure immunity from prosecution under the federal Anti-Kickback Statute. Although full compliance with these provisions ensures against prosecution under the federal Anti-Kickback Statute, the failure of a transaction or arrangement to fit within a specific safe harbor does not necessarily mean that the transaction or arrangement is illegal or that prosecution under the federal Anti-Kickback Statute will be pursued. Additionally, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, ACA) codified case law that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal False Claims Act.

The federal civil and criminal false claims laws, including the federal False Claims Act, and civil monetary penalty laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or fraudulent.

HIPAA also created new federal crimes, including health care fraud and false statements relating to health care matters. The health care fraud statute prohibits knowingly and willfully executing a scheme to defraud any health care benefit program, including private third-party payers. The false statements statute prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for health care benefits, items or services.

The federal Physician Payments Sunshine Act which require certain manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program (with certain exceptions) to report annually to CMS information related to payments or other transfers of value made to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members.

Many states have laws similar to the federal laws described above and the state laws may be broader in scope and may apply regardless of payor, such as state anti-kickback and false claims laws that may apply to sales or marketing arrangements and claims involving healthcare items or services reimbursed by non-governmental third party payors, including private insurers, or that apply regardless of payor, state laws that require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government, state and local laws that require drug manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures, state laws that require the reporting of information related to drug pricing, and state and local laws requiring the registration of pharmaceutical sales and medical representatives.

Additionally, the U.S. Foreign Corrupt Practices Act (“FCPA”) prohibits U.S. corporations and their representatives from offering, promising, authorizing or making payments to any foreign government official, government staff member, political party or political candidate in an attempt to obtain or retain business abroad. The scope of the FCPA includes interactions with certain healthcare professionals in many countries. Other countries have enacted similar anti-corruption laws and/or regulations.

If our operations are found to be in violation of any of the laws described above, or any other governmental regulations that apply to us, we may be subject significant civil, criminal and administrative sanctions, damages, disgorgement, monetary fines, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, imprisonment, integrity oversight and reporting obligations, contractual damages, reputational harm, diminished profits and future earnings, and curtailment or restructuring of our operations.

Coverage and Reimbursement

Patients generally rely on third-party payors to reimburse part or all of the costs associated with medical products. Accordingly, market acceptance of medical products can depend on the extent to which third-party coverage and reimbursement is available from government health administration authorities, private healthcare insurers and other healthcare funding organizations.

For example, in the United States, healthcare providers are reimbursed for covered services and products they deliver through Medicare, Medicaid and other government healthcare programs, as well as through private payers. Pharmacies are also reimbursed in a similar manner for drug products they dispense. Pharmaceutical companies may be required to provide specified rebates or discounts on the products it sells to certain government funded programs, including Medicare and Medicaid, and those rebates or discounts have increased over time. The ACA increased many of these mandatory discounts and rebates required and imposed a new Branded Prescription Pharmaceutical Manufacturers and Importers fee payable each year certain pharmaceutical companies and manufacturers.

Outside of the United States, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug pricing vary widely from country to country. For example, the EU provides options for its member states to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. A member state may approve a specific price for the medicinal product, or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market. Historically, products launched in the EU do not follow price structures of the United States and generally tend to be significantly lower.

MAJOR CUSTOMERS AND SOURCES OF REVENUES

Major Sources of Revenues

The following table shows our major sources of revenues, as a percentage of total revenues, that were recognized during the years ended December 31, 2018 and 2017:

(1) For 2018, reflects income from grants to BioTime from the National Institutes of Health (NIH).

(2) For 2018 and 2017, one individual customer represents greater than 5% of total revenues. These revenues were generated by LifeMap Sciences, which is a subsidiary of AgeX. The 2018 revenues shown are for the period January 1, 2018 through August 29, 2018. As a result of the AgeX Deconsolidation on August 30, 2018, BioTime does not expect to recognize subscription and advertisement revenues during subsequent accounting periods

Geographic Area

(1) Amounts recognized prior to adoption of Topic 606 have not been adjusted under the Topic 606 modified retrospective transition method.

(2) Foreign revenues are primarily generated from grants in Israel.

MARKETING

Plasma Volume Expanders

Hextend^® is being distributed in the U.S. by Hospira and in South Korea by CJ Healthcare under exclusive licenses from us. Because Hextend is a surgical product, sales efforts are directed to physicians and hospitals. Hextend competes with other products used to treat or prevent hypovolemia, including albumin, generic 6% hetastarch solutions, and crystalloid solutions. The competing products have been commonly used in surgery and trauma care for many years, and in order to sell Hextend, physicians must be convinced to change their product loyalties. The market price of albumin has declined and generic 6% hetastarch solutions sell at low prices, which has caused Hospira and CJ Healthcare to lower the prices at which they sell Hextend.

In addition to price competition, sales of Hextend have been adversely affected if certain safety labeling changes required by the FDA for the entire class of hydroxyethyl starch products, including Hextend. The labeling changes were approved by the FDA in November 2013 and include a boxed warning stating that the use of hydroxyethyl starch products, including Hextend, increases the risk of mortality and renal injury requiring renal replacement therapy in critically ill adult patients, including patients with sepsis, and that Hextend should not be used in critically ill adult patients, including patients with sepsis. Warning and precaution information is required along with information about contraindications, adverse reactions, and certain recent studies. The warning and precautions include avoiding the use of Hextend in patients with pre-existing renal dysfunction, that the coagulation status of patients undergoing open heart surgery in association with cardiopulmonary bypass should be monitored as excess bleeding has been reported with hydroxyethyl starch solutions in that population, that the use of Hextend should be discontinued at the first sign of coagulopathy, and that the liver function of patients receiving hydroxyethyl starch products, including Hextend should also be monitored.

Therapeutic Products and Medical Devices

Because our planned therapeutic products and medical devices are still in the research and development stage, we will not initially need to have our own marketing personnel. If we or our subsidiaries are successful in developing marketable therapeutic products and medical devices, we will need to build our own marketing and distribution capability for those products, which would require the investment of significant financial and management resources, or we and our subsidiaries will need to find collaborative marketing partners, independent sales representatives, or wholesale distributors for the commercial sale of those products.

If we market products through arrangements with third parties, we may pay sales commissions to sales representatives or we may sell or consign products to distributors at wholesale prices. This means that our gross profit from product sales may be less than would be the case if we were to sell our products directly to end users at retail prices through our own sales force. On the other hand, selling to distributors or through independent sales representatives would allow us to avoid the cost of hiring and training our own sales employees. There can be no assurance we will be able to negotiate distribution or sales agreements with third parties on favorable terms to justify our investment in our products or achieve sufficient revenues to support our operations.

COMPETITION

We face substantial competition in all of fields of business in which we engage. That competition is likely to intensify as new products and technologies reach the market. Superior new products are likely to sell for higher prices and generate higher profit margins if acceptance by the medical community is achieved. Those companies that are successful at being the first to introduce new products and technologies to the market may gain significant economic advantages over their competitors in the establishment of a customer base and track record for the performance of their products and technologies. Such companies will also benefit from revenues from sales that could be used to strengthen their research and development, production, and marketing resources. Companies engaged in the medical products industry face the risk of obsolescence of their products and technologies as more advanced or cost-effective products and technologies are developed by competitors. As the industry matures, companies will compete based upon the performance and cost-effectiveness of their products.

Products for Regenerative Medicine

The cell therapy industry is characterized by rapidly evolving technology and intense competition. Our competitors include major multinational pharmaceutical companies, specialty biotechnology companies, and chemical and medical products companies operating in the fields of regenerative medicine, cell therapy, tissue engineering, and tissue regeneration. Many of these companies are well established and possess technical, research and development, financial, and sales and marketing resources significantly greater than ours. In addition, certain smaller biotech companies have formed strategic collaborations, partnerships, and other types of joint ventures with larger, well-established industry competitors that afford the smaller companies’ potential research and development as well as commercialization advantages. Academic institutions, governmental agencies, and other public and private research organizations are also conducting and financing research activities, which may produce products directly competitive to those we are developing.

We believe that some of our competitors are trying to develop pluripotent cells and hEPC-based technologies and products that may compete with our stem cell products based on efficacy, safety, cost, and intellectual property positions. Ocata, which was recently acquired by a subsidiary of Astellas Pharma Inc., and Retinal Patch Technologies Inc. are conducting clinical trials of a hES cell products designed to treat age-related macular degeneration. If their products are proven to be safe and effective, they may reach the market ahead of OpRegen.

We may also face competition from companies that have filed patent applications relating to the propagation and differentiation of stem cells. Those companies include Ocata, which in 2015 had certain U.S. patents issue with claims directed to methods of producing RPE cells and isolating and purifying such cells. We may be required to seek licenses from these competitors in order to commercialize certain products proposed by us, and such licenses may not be granted.

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, which could materially adversely affect our proposed operations, our 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.

Risks Related to Our Business Operations and Capital Requirements

We have incurred operating losses since inception, and we do not know if we will attain profitability.

Our total operating losses for the fiscal years ended December 31, 2018 and 2017 were $41.8 million and $38.9 million respectively, and we had an accumulated deficit of $262 million, as of December 31, 2018. Generally, we have primarily financed our operations through sales of our equity securities, licensing fees, royalties on product sales by our licensees, research grants, and subscription fees and advertising revenue from database products. In August 2018, we sold 14,400,000 of our shares of AgeX common stock to Juvenescence Limited for aggregate gross proceeds of approximately $43 million, which we will also use to finance our operations. From and after that transaction, we will no longer recognize revenues from subscription fees and advertising revenue from the sale database products of LifeMap Sciences, an AgeX subsidiary. To partially cover our operating costs, we also charge fees for shared services we perform and office and laboratory space we provide to both OncoCyte and AgeX, which can be terminated by either party. Ultimately, our ability to generate sufficient operating revenue to earn a profit depends upon our success in developing and marketing or licensing products and technology.

We will spend a substantial amount of our capital on research and development, but we might not succeed in developing products and technologies that are useful in medicine.

We are attempting to develop new medical products and technology. None of our experimental products and technologies has received regulatory approval for commercialization. These new products and technologies might not prove to be safe and efficacious in the human medical applications for which they are being developed. Our research and development activities are costly, time consuming, and their results are uncertain. We incurred research and development expenses amounting to $21.0 million and $24.0 million during the fiscal years ended December 31, 2018 and 2017, respectively. If successfully develop a new technology or product, refinement of the new technology or product and definition of the practical applications and limitations of the technology or product may take years and require large sums of money. Clinical trials of new therapeutic products, particularly those products that are regulated as biologics, drugs, or devices, are very expensive and take years to complete. We may not have the financial resources to fund clinical trials on our own and we may have to enter into licensing or collaborative arrangements with others. Any such arrangements may be dilutive to our ownership or economic interest in the products we develop, and we might have to accept royalty payments on product sales rather than receiving the gross revenues from product sales. In addition, we may discontinue one or more of the research or product development programs. Our product and technology development programs may be delayed or discontinued should adequate funding on acceptable terms not be available.

The amount and pace of research and development work that we can do or sponsor, and our ability to commence and complete clinical trials required to obtain regulatory approval to market our therapeutic and medical device products, depends upon the amount of funds we have.

At December 31, 2018, we had $30.7 million of cash, cash equivalents and marketable equity securities on hand, including the $21.6 million of proceeds we received through the sale of a significant portion of our AgeX shares to Juvenescence in August 2018, there can be no assurance that we or our subsidiaries will be able to raise additional funds on favorable terms or at all, or that any funds raised will be sufficient to permit us or our subsidiaries to develop and market our products and technology. Unless we are able to generate sufficient revenue or raise additional funds when needed, it is likely that we will be unable to continue our planned activities, even if we make progress in our research and development projects. We may have to postpone or limit the pace of our research and development work and planned clinical trials of our product candidates unless our cash resources increase through a growth in revenues or additional equity investment or borrowing.

We will need to issue additional equity or debt securities in order to raise additional capital needed to pay our operating expenses.

We expect to continue to incur substantial research and product development expenses and will need to raise additional capital to pay operating expenses until we are able to generate sufficient revenues from product sales, royalties and license fees. Our ability to raise additional equity or debt capital will depend, not only on progress made in developing new products and technologies, but also on access to capital and conditions in the capital markets. Any equity capital raise could result in the dilution of the interests of shareholders or may otherwise limit our ability to finance further in the future, which may negatively impact our business and operations. Any debt capital financing may involve covenants that restrict our operations, including limitations on additional borrowing and on the use of our assets. If we raise capital through licensing arrangements, it may be necessary to grant licenses on terms that are not favorable to us. There can be no assurance that we will be able to raise capital on favorable terms, or at all, or at times and in amounts needed to successfully finance product development, clinical trials, and general operations.

Failure to successfully combine the businesses of BioTime and Asterias in the expected time frame or realize the expected benefits of such combination may adversely affect our future results.

The success of our acquisition of Asterias will depend, in part, on our ability to realize the anticipated benefits from combining its business with ours. To realize these anticipated benefits, the businesses of BioTime and Asterias must be successfully combined. Our management may face significant challenges in consolidating the functions of BioTime and Asterias, integrating the technologies, organizations, procedures, policies and operations, as well as integrating the different business cultures of the two companies, prioritizing the scientific and clinical programs and retaining key personnel. If we are unable to successfully integrate Asterias’ operations, the anticipated benefits of the acquisition may not be realized fully or at all, may require significant investment to achieve the benefits or may take longer to realize than expected. The integration process and other disruptions resulting from the acquisition may also disrupt each company’s ongoing businesses and/or adversely affect our relationships with employees, regulators and others with whom we have business or other dealings.

Integrating the companies may divert our resources and management’s attention away from our operations.

Successful integration of Asterias’ operations, products and personnel with ours following the acquisition may be complex, time consuming and place a significant burden on our management and internal resources. The diversion of management attention and any difficulties encountered in the transition and integration process could harm our business, financial condition, operating results and evaluating strategic actions.

A lawsuit has been filed and other lawsuits may be filed against Asterias, BioTime and certain members of their respective boards of directors challenging the Asterias merger. An adverse ruling in any such lawsuit may result in additional payments and costs.

On February 19, 2019, a putative class action lawsuit relating to the Asterias acquisition was filed on behalf of Asterias shareholders in the Superior Court of the State of California in the County of Alameda against, among other parties, Asterias, the members of Asterias’ board of directors, BioTime, Neal Bradsher, Broadwood Capital, Inc. and Broadwood Capital Partners, L.P. The lawsuit asserts claims for breach of fiduciary duty and aiding and abetting breach of fiduciary duty, alleging that the consideration Asterias shareholders are to receive in the merger is unfair, the merger is the product of an unfair process, and the joint proxy statement omits certain allegedly material information. The complaint seeks, injunctive relief or rescissory damages and an award of plaintiffs’ expenses and attorneys’ fees.

The defendants specifically deny all allegations in the litigation, including that any additional disclosure was or is required and intend to defend it vigorously. To moot the disclosure claims in the complaint, Asterias and BioTime made supplemental disclosures to the joint proxy statement relating to the merger. However, any adverse ruling in these cases could result in additional payments. Additional lawsuits arising out of or relating to the merger agreement and/or the merger may be filed in the future.

Comprehensive tax reform legislation could adversely affect our business and financial condition.

The U.S. government has enacted comprehensive tax legislation, known as the Tax Cuts and Jobs Act of 2017 (“Tax Act”) that includes significant changes to the taxation of business entities. This federal income tax law, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses), limitation of the deduction for net operating losses to 80% of current year taxable income for net operating losses generated after December 31, 2017 and elimination of net operating loss carrybacks, one time taxation of offshore earnings at reduced rates regardless of whether they are repatriated, elimination of U.S. tax on foreign earnings (subject to certain important exceptions), immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifying or repealing many business deductions and credits. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal tax law is uncertain and our business and financial condition could be adversely affected. In addition, it is uncertain if and to what extent various states will conform to the federal tax law.

Our ability to use net operating losses to offset future taxable income may be subject to limitations.

As of December 31, 2018, we had federal and state gross net operating loss (“NOLs”) carryforwards of approximately $136.9 million. The federal and state NOL carryforwards will begin to expire, if not utilized, in varying amounts between 2028 and 2037. These NOL carryforwards could expire unused and be unavailable to offset future income tax liabilities. Under federal income tax law, federal NOLs incurred in 2018 and in future years may be carried forward indefinitely, but the deductibility of such federal NOLs is limited. It is uncertain if and to what extent various states will conform to the federal tax law. In addition, under Section 382 of the Internal Revenue Code of 1986, as amended (the “IRC”, and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50% change, by value, in its equity ownership over a three-year period, the corporation’s ability to use its pre-change NOL carryforwards and other pre-change tax attributes to offset its post-change income or taxes may be limited. We may experience ownership changes in the future as a result of subsequent shifts in our stock ownership, some of which may be outside of our control. If an ownership change occurs and our ability to use our NOL carryforwards is materially limited, it would harm our future operating results by effectively increasing our future tax obligations.

Under the provisions of the IRC, changes in our ownership, in certain circumstances, will limit the amount of federal NOLs that can be utilized annually in the future to offset taxable income. In particular, IRC Section 382 imposes limitations on a company’s ability to use NOLs upon certain changes in such ownership. Calculations pursuant to IRC Section 382 can be very complicated and no assurance can be given that upon further analysis, our ability to take advantage of our NOLs may be limited to a greater extent than we currently anticipate. If we are limited in our ability to use our NOLs in future years in which we have taxable income, we will pay more taxes than if we were able to utilize our NOLs fully. We may experience ownership changes in the future as a result of subsequent shifts in our stock ownership that we cannot predict or control that could result in further limitations being placed on our ability to utilize our federal NOLs.

Failure in our information technology and storage systems could significantly disrupt the operation of our business.

Our ability to execute our business plan and maintain operations depends on the continued and uninterrupted performance of our information technology (“IT”) systems. IT systems are vulnerable to risks and damages from a variety of sources, including telecommunications or network failures, malicious human acts and natural disasters. Moreover, despite network security and back-up measures, some of our and our vendors’ servers are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems. Despite precautionary measures to prevent unanticipated problems that could affect our IT systems, sustained or repeated system failures that interrupt our ability to generate and maintain data could adversely affect our ability to operate our business.

Our business and operations could suffer in the event of system failures.

Despite the implementation of security measures, our internal computer systems and those of our contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters including earthquakes and tsunamis, terrorism, war, and telecommunication and electrical failures. Such events could cause significant interruption of our operations and development programs. For example, the loss of data for our product candidates could result in delays in our regulatory filings and development efforts and significantly increase our costs. To the extent that any disruption or security breach was to result in a loss of or damage to our data, or inappropriate disclosure of confidential or proprietary information, we could incur liability and the development of our product candidates could be delayed.

In addition, our product candidates are manufactured by starting with cells that are stored in a cryopreserved master cell bank. While we believe we have adequate backup should any cell bank be lost in a catastrophic event, it is possible that we or our third-party suppliers and manufacturers could lose multiple cell banks and have our manufacturing severely impacted by the need to replace the cell banks. See “—We will face risks related to our own manufacturing capabilities and those related to our reliance on third parties to manufacture product.” We cannot assure you that any stability or other issues relating to the manufacture of any of our product candidates or products will not occur in the future. Any delay or interruption in the supply of clinical trial supplies could delay the completion of planned clinical trials, increase the costs associated with maintaining clinical trial programs and, depending upon the period of delay, require us to commence new clinical trials at additional expense or terminate clinical trials completely. Any adverse developments affecting clinical or commercial manufacturing of our product candidates or products may result in shipment delays, inventory shortages, lot failures, product withdrawals or recalls or other interruptions in the supply of our product candidates or products. Accordingly, failures or difficulties faced at any level of our supply chain could adversely affect our business and delay or impede the development and commercialization of any of our product candidates or products and could have an adverse effect on our business, prospects, financial condition and results of operations.

Significant disruptions of information technology systems or data security breaches could adversely affect our business.

We are increasingly dependent on information technology systems and infrastructure to operate our business. In the ordinary course of our business, we collect, store, process and transmit large amounts of confidential information, including intellectual property, proprietary business information and personal information. It is critical that we do so in a secure manner to maintain the confidentiality, integrity and availability of such information. We have also outsourced some of our operations (including parts of our information technology infrastructure) to a number of third-party vendors who may have, or could gain, access to our confidential information. In addition, many of those third parties, in turn, subcontract or outsource some of their responsibilities to third parties.

Our information technology systems are large and complex and store large amounts of confidential information. The size and complexity of these systems make them potentially vulnerable to service interruptions or to security breaches from inadvertent or intentional actions by our employees, third party vendors and/or business partners, or from cyber-attacks by malicious third parties. Attacks of this nature are increasing in frequency, persistence, sophistication and intensity, and are being conducted by sophisticated and organized groups and individuals with a wide range of motives (including, but not limited to, industrial espionage) and expertise, including organized criminal groups, “hacktivists,” nation states and others. In addition to the extraction of important information, such attacks could include the deployment of harmful malware, ransomware, denial-of-service attacks, social engineering and other means to affect service reliability and threaten the confidentiality, integrity and availability of our information. Although the aggregate impact on our operations and financial condition has not been material to date, we have been the target of events of this nature and expect them to continue.

Significant disruptions of our, our third party vendors’ and/or business partners’ information technology systems or security breaches could adversely affect our business operations and/or result in the loss, misappropriation, and/or unauthorized access, use or disclosure of, or the prevention of access to, confidential information (including trade secrets or other intellectual property, proprietary business information and personal information), and could result in financial, legal, business and reputational harm to us. Any such event that leads to unauthorized access, use or disclosure of personal information, including personal information regarding our patients or employees, could harm our reputation, compel us to comply with federal and/or state breach notification laws and foreign law equivalents, subject us to mandatory corrective action, require us to verify the correctness of database contents and otherwise subject us to liability under laws and regulations that protect the privacy and security of personal information, which could disrupt our business, result in increased costs or loss of revenue, and/or result in significant legal and financial exposure. In addition, security breaches and other inappropriate access can be difficult to detect, and any delay in identifying them may further harm us. Moreover, the prevalent use of mobile devices to access confidential information increases the risk of security breaches. While we have implemented security measures to protect our information technology systems and infrastructure, there can be no assurance that such measures will prevent service interruptions or security breaches that could adversely affect our business. In addition, failure to maintain effective internal accounting controls related to security breaches and cybersecurity in general could impact our ability to produce timely and accurate financial statements and subject us to regulatory scrutiny.

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

We believe that our continued success depends to a significant extent upon our efforts and ability to retain highly qualified personnel, including our Chief Executive Officer, Brian Culley. All of our officers and other employees are at-will employees and may terminate their employment with us at any time with no advance notice. The loss of the services of Mr. Culley or other members of our senior management could have a material adverse effect on us. Further, the replacement of any of such individuals likely would involve significant time and costs and may significantly delay or prevent the achievement of our business and clinical objectives and would harm our business.

The value of our investments in other companies fluctuates based on their respective stock prices and could be negatively impacted by poor business performance.

We have equity investments in several publicly-listed companies, including OncoCyte and AgeX. As of March 13, 2019, the value of our investments in OncoCyte and AgeX was $63.1 million based on their stock prices as of that date. If these companies were to have delays in clinical trials or commercialization activities, the value of their common stock and the valuation of our investment could be negatively impacted. If these companies were to fail and ultimately cease operations, we may lose the entire value of our investments.

Failure of our internal control over financial reporting could harm our business and financial results.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Our growth and entry into new products, technologies and markets will place significant additional pressure on our system of internal control over financial reporting. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud. Operating our business through subsidiaries, some of which are located in foreign countries, also adds to the complexity of our internal control over financial reporting and adds to the risk of a system failure, an undetected improper use or expenditure of funds or other resources by a subsidiary, or a failure to properly report a transaction or financial results of a subsidiary. We allocate certain expenses among BioTime itself and one or more of our subsidiaries, which creates a risk that the allocations we make may not accurately reflect the benefit of an expenditure or use of financial or other resources by BioTime as the parent company and the subsidiaries among which the allocations are made. An inaccurate allocation may impact our consolidated financial results, particularly in the case of subsidiaries that we do not wholly own since our financial statements include adjustments to reflect the minority ownership interests in our subsidiaries held by others.

Risks Related to Government Regulation

We may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws, false claims laws, transparency laws, and health information privacy and security laws. If we are unable to comply, or have not fully complied, with such laws, it could face substantial penalties.

If we obtain FDA approval for any of our product candidates or technologies and begin commercializing those products or technologies in the United States, our operations may be subject to various federal and state fraud and abuse laws, including, without limitation, the federal Anti-Kickback Statute, the federal False Claims Act, and physician sunshine laws and regulations. These laws may impact, among other things, our proposed sales, marketing, and education programs. In addition, we may be subject to patient privacy regulation by both the federal government and the states in which we conduct our business. The laws that may affect our ability to operate include:

Because of the breadth of these laws and the narrowness of the statutory exceptions and regulatory safe harbors available, it is possible that some of our business activities could be subject to challenge under one or more of such laws. In addition, recent health care reform legislation has strengthened these laws.

If our operations are found to be in violation of any of the laws described above or any other governmental regulations that apply, we may be subject to significant penalties, including administrative, civil and criminal penalties, damages, fines, disgorgement, exclusion from participation in government health care programs, such as Medicare and Medicaid, integrity oversight and reporting obligations, imprisonment, and the curtailment or restructuring of our operations, any of which could adversely affect our ability to operate our business and our results of operations.

If we do not receive regulatory approvals, we will not be permitted to sell our therapeutic and medical device products.

The therapeutic and medical device products that we and our subsidiaries develop cannot be sold until the FDA and corresponding foreign regulatory authorities approve the products for medical use. The need to obtain regulatory approval to market a new product means that:

Government-imposed bans or restrictions and religious, moral, and ethical concerns about the use of hES cells could prevent us from developing and successfully marketing stem cell products.

Government-imposed bans or restrictions on the use of embryos or hES cells in research and development in the United States and abroad could generally constrain stem cell research, thereby limiting the market and demand for our products. During March 2009, President Obama lifted certain restrictions on federal funding of research involving the use of hES cells, and in accordance with President Obama’s Executive Order, the National Institutes of Health (NIH) has adopted guidelines for determining the eligibility of hES cell lines for use in federally funded research. The central focus of the guidelines is to assure that hES cells used in federally funded research were derived from human embryos that were created for reproductive purposes, were no longer needed for this purpose, and were voluntarily donated for research purposes with the informed written consent of the donors. The hES cells that were derived from embryos created for research purposes rather than reproductive purposes, and other hES cells that were not derived in compliance with the guidelines, are not eligible for use in federally funded research. California law requires that stem cell research be conducted under the oversight of a stem cell review oversight committee (SCRO). Many kinds of stem cell research, including the derivation of new hES cell lines, may only be conducted in California with the prior written approval of the SCRO. A SCRO could prohibit or impose restrictions on the research that we plan to do. The use of hES cells may give rise to religious, moral, and ethical issues. These considerations could lead to more restrictive government regulations or could generally constrain stem cell research, thereby limiting the market and demand for our products.

We expect that the commercial opportunity for some of our products may depend on our ability to obtain reimbursement and continued coverage from various payors, including government entities and insurance companies.

If these third-party payors do not consider our products to be cost-effective compared to other therapies, they may not cover our products as a benefit under their plans or, if they do, the level of payment may not be sufficient to allow us to sell our products on a profitable basis.

For example, in the United States, healthcare providers are reimbursed for covered services and products they deliver through Medicare, Medicaid and other government healthcare programs, as well as through private payers. Pharmacies are also reimbursed in a similar manner for drug products they dispense. We may be required to provide specified rebates or discounts on the products we sell to certain government funded programs, including Medicare and Medicaid, and those rebates or discounts have increased over time. The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, ACA), enacted in 2010, increased many of the mandatory discounts and rebates required of us and imposed a new Branded Prescription Pharmaceutical Manufacturers and Importers fee payable each year by us and other manufacturers.

We face similar issues outside of the United States. In some non-U.S. jurisdictions, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug pricing vary widely from country to country. For example, the EU provides options for its member states to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. A member state may approve a specific price for the medicinal product, or it may instead adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market. There can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable reimbursement and pricing arrangements for any of our products. Historically, products launched in the EU do not follow price structures of the United States and generally tend to be significantly lower.

The ACA and future changes to that law may adversely affect our business.

As a result of the adoption of the ACA, in the United States, substantial changes have been made to the system for paying for healthcare in the United States. Among the ACA’s provisions of importance to our industry are that it:

Some of the provisions of the ACA have yet to be implemented, and there have been judicial and Congressional challenges to certain aspects of the ACA, as well as recent efforts by the Trump administration to repeal or replace certain aspects of the ACA. Since January 2017, President Trump has signed two Executive Orders and other directives designed to delay the implementation of certain provisions of the ACA. Concurrently, Congress has considered legislation that would repeal or repeal and replace all or part of the ACA. While Congress has not passed comprehensive repeal legislation, it has enacted laws that modify certain provisions of the ACA such as removing penalties, starting January 1, 2019, for not complying with the ACA’s individual mandate to carry health insurance, and delaying the implementation of certain ACA-mandated fees. On December 14, 2018, a Texas U.S. District Court Judge ruled that the ACA is unconstitutional in its entirety because the “individual mandate” was repealed by Congress as part of the Tax Act. While the Texas U.S. District Court Judge, as well as the Trump administration and CMS, have stated that the ruling will have no immediate effect pending appeal of the decision, it is unclear how this decision, subsequent appeals, and other efforts to repeal and replace the ACA will impact the ACA and our business.

In addition, other legislative changes have been proposed and adopted since the Affordable Care Act was enacted. For example, the Budget Control Act of 2011, includes reductions to Medicare payments to providers of 2% per fiscal year, which went into effect on April 1, 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2027 unless additional Congressional action is taken. On January 2, 2013, the American Taxpayer Relief Act of 2012 was signed into law, which, among other things, reduced Medicare payments to several providers, including hospitals, and increased the statute of limitations period for the government to recover overpayments to providers from three to five years.

Further, there has been heightened governmental scrutiny in the United States of pharmaceutical pricing practices in light of the rising cost of prescription drugs and biologics. Such scrutiny has resulted in several recent congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency to product pricing, review the relationship between pricing and manufacturer patient programs, and reform government program reimbursement methodologies for products. For example, the Trump administration released a “Blueprint” to lower drug prices and reduce out of pocket costs of drugs that contains additional proposals to increase drug manufacturer competition, increase the negotiating power of certain federal healthcare programs, incentivize manufacturers to lower the list price of their products, and reduce the out of pocket costs of drug products paid by consumers. On January 31, 2019, the [U.S. Department of Health and Human Services, Office of Inspector General, proposed modifications to the federal Anti-Kickback Statute discount safe harbor for the purpose of reducing the cost of drug products to consumers which, among other things, if finalized, will affect discounts paid by manufacturers to Medicare Part D plans, Medicaid managed care organizations and pharmacy benefit managers working with these organizations. While some of these and other proposed measures may require additional authorization to become effective, Congress and the Trump administration have each indicated that it will continue to seek new legislative and/or administrative measures to control drug costs.

If we fail to comply with the extensive legal and regulatory requirements affecting the health care industry, we could face increased costs, penalties and a loss of business.

Our activities, and the activities of our collaborators, distributors and other third-party providers, are subject to extensive government regulation and oversight both in the U.S. and in foreign jurisdictions. The FDA and comparable agencies in other jurisdictions will directly regulate many of our most critical business activities, including the conduct of preclinical and clinical studies, product manufacturing, advertising and promotion, product distribution, adverse event reporting and product risk management. Our interactions in the U.S. or abroad with physicians and other health care providers that may prescribe or purchase our products are also subject to government regulation designed to prevent fraud and abuse in the sale and use of the products and place greater restrictions on the marketing practices of health care companies. Health care companies are facing heightened scrutiny of their relationships with health care providers from anti-corruption enforcement officials. In addition, health care companies have been the target of lawsuits and investigations alleging violations of government regulation, including claims asserting submission of incorrect pricing information, impermissible off-label promotion of pharmaceutical products, payments intended to influence the referral of health care business, submission of false claims for government reimbursement, antitrust violations or violations related to environmental matters. Risks relating to compliance with laws and regulations may be heightened as we bring products to the market globally.

Regulations governing the health care industry are subject to change, with possibly retroactive effect, including:

Violations of governmental regulation may be punishable by criminal and civil sanctions against us, including fines and civil monetary penalties and exclusion from participation in government programs, including Medicare and Medicaid, as well as against executives overseeing our business. In addition to penalties for violation of laws and regulations, we could be required to repay amounts we received from government payors or pay additional rebates and interest if we are found to have miscalculated the pricing information we have submitted to the government. We cannot ensure that our compliance controls, policies and procedures will in every instance protect us from acts committed by our employees, collaborators, partners or third-party providers that would violate the laws or regulations of the jurisdictions in which we operate. Whether or not we have complied with the law, an investigation into alleged unlawful conduct could increase our expenses, damage our reputation, divert management time and attention and adversely affect our business.

Even if we receive approval for our products, we may be subject to extensive regulatory obligations in order to commercialize our products.

Even after initial FDA or foreign regulatory agency approval has been obtained, further studies may be required to provide additional data on safety or to gain approval for the use of a product as a treatment for clinical indications other than those initially targeted. Use of a product during testing and after marketing could reveal side effects that could delay, impede, or prevent marketing approval, result in a regulatory agency-ordered product recall, or in regulatory agency-imposed limitations on permissible uses or in withdrawal of approval. For example, if the FDA or foreign regulatory agency becomes aware of new safety information after approval of a product, it may require us to conduct further clinical trials to assess a known or potential serious risk and to assure that the benefit of the product outweigh the risks. If we are required to conduct such a post-approval study, periodic status reports must be submitted to the FDA or foreign regulatory agency. Failure to conduct such post-approval studies in a timely manner may result in substantial civil or criminal penalties. Data resulting from these clinical trials may result in expansions or restrictions to the labeled indications for which a product has already been approved. Any of these requirements or actions may negatively impact our business or operations.

If we are deemed to be an investment company, we may have to institute burdensome compliance requirements and our activities may be restricted.

An entity that, among other things, is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, owning, trading or holding certain types of securities would be deemed an investment company under the Investment Company Act of 1940, as amended (the “1940 Act”). Based on the securities we hold, including our equity ownership in publicly traded companies, we may not meet the requirements for an exemption promulgated under the 1940 Act. If we are deemed to be an investment company under the 1940 Act, we would be subject to additional limitations on operating our business, including limitations on the issuance of securities, which may make it difficult for us to raise capital.

Risks Related to Our Clinical Development and Commercial Operations

Clinical studies are costly, time consuming and are subject to risks that could delay or prevent commercialization of our current or future product candidates.

We cannot guarantee that any clinical studies will be conducted as planned or completed on schedule, if at all. A failure of one or more clinical studies can occur at any stage of development. Events that may prevent successful or timely completion of clinical development include but are not limited to:

Any inability to successfully complete clinical development and obtain regulatory approval could result in additional costs to us or impair our ability to generate revenue. Clinical study delays could also shorten any periods during which our products have patent protection and may allow competitors to develop and bring products to market before we do and may harm our business and results of operations.

Preliminary data and interim results we disclose, and results from earlier studies, may not be predictive of the final results, or of later studies or future clinical trials.

All of our product candidates are still in an early stage of development, and no assurances can be given that the development of any of our product candidates will ultimately be successful. Although we may from time to time disclose results from preclinical testing or preliminary data or interim results from our clinical studies of our product candidates, and earlier clinical studies, including clinical studies with similar product candidates, are not necessarily predictive of future results, including clinical trial results.

The results of our current and future clinical trials may differ from results achieved in earlier preclinical and clinical studies for a variety of reasons, including:

Even if our current and planned clinical trials are successful, we will need to conduct additional clinical trials, which may include registrational trials, trials in additional patient populations or under different treatment conditions, and trials using different manufacturing protocols, processes, materials or facilities or under different manufacturing conditions, before we are able to seek approvals for our product candidates from the FDA and regulatory authorities outside the United States to market and sell these product candidates. Our failure to meet the requirements to support marketing approval for our product candidates in our ongoing and future clinical trials would substantially harm our business and prospects.

The commercial success of any of our current or future product candidates will depend upon the degree of market acceptance by physicians, patients, third-party payors, other health care providers and others in the medical community.

Even if a product candidate obtains regulatory approval, its commercial success will depend in part on physicians, patients, third-party payors, other health care providers and others in the medical community accepting our product candidates as medically useful, cost-effective, and safe. Any product we bring to the market may not gain market acceptance by such parties. The degree of market acceptance of any of our products will depend on several factors, including without limitation:

Even if a product displays a favorable efficacy and safety profile upon approval, market acceptance of the product will be uncertain. Efforts to educate the medical community and third-party payors on the benefits of the products may require significant investment and resources and may never succeed. If our products fail to achieve an adequate level of acceptance by physicians, patients, third-party payors, other health care providers and others in the medical community, we will not be able to generate sufficient revenue to become or remain profitable.

If the market opportunities for our product candidates are smaller than we believe and estimate they are, we may not meet our revenue expectations and, even assuming approval of a product candidate, our business may suffer.

Our projections of the number of potential users in the markets we are attempting to address are based on our beliefs and estimates. Bear in mind:

Sales of the products we may develop will be adversely impacted by the availability of competing products.

Our products and product candidates will face substantial competition, whether through the development of safer and more effective alternatives to our products, lower costs to administer than our products or other forms of competition such as more favorable distribution, reimbursement and pricing or formulary and health care provider acceptance. For example, sales of Hextend have been adversely impacted by the availability of other products commonly used in surgery and trauma care and sell at low prices. Ocata, which has been acquired by Astellas Pharma, Inc., is conducting a clinical trial of a RPE cell product designed to treat geographic atrophy. If Astellas’ product candidate is proven to be safe and effective, it may be approved and reach the market ahead of OpRegen. Moreover, Astellas’ patent portfolio with respect to the manufacture of its RPE products could adversely impact our rights to manufacture OpRegen. In addition, even if our products are approved, physicians, patients and others in the medical community may be reluctant to try a new product due to the high degree of risk associated with the application of new technologies and products in the field of human medicine.

We will face risks related to our own manufacturing capabilities and those related to our reliance on third parties to manufacture products, including those related to product acquisition costs, production delays, and supply shortages that could impair our ability to complete the development and commercialization of our product candidates.

The manufacture of medical products is complex and requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. We do not currently have nor do we plan to acquire the infrastructure or capability to internally manufacture Renevia or our other HyStem products on a clinical or commercial scale. Although we are developing manufacturing capability through Cell Cure for OpRegen in Israel, we will need greater manufacturing capacity if we are to successfully commercialize our products. Unless we can raise the capital required to construct our own commercial scale manufacturing facilities and can develop the expertise to manage and operate a manufacturing facility of our own, we may need to rely on third-party manufacturers to manufacture any products we develop. There is no assurance that we will be able to identify manufacturers on acceptable terms or at all. Regardless of whether we do our own manufacturing or rely on third parties to manufacture products for us, we will face risks related to the manufacture of our products including these risks:

In addition, we may rely on third parties to perform release testing on our product candidates prior to delivery to patients. If these tests are not appropriately conducted and test data are not reliable, patients could be put at risk of serious harm which could result in product liability suits.

If we or any third-party manufacturers we may engage were to encounter any of these difficulties, our ability to provide our product candidates to patients in clinical trials or to the medical market place would be jeopardized. Any delay or interruption in the supply of clinical trial supplies could delay the completion of clinical trials, increase the costs associated with maintaining clinical trial programs and, depending upon the period of delay, could require us to either commence new clinical trials at additional expense or terminate clinical trials completely. Each risk could delay our clinical trials, any approval of our product candidates by the FDA, or the commercialization of our product candidates, and could result in higher costs or deprive us of potential product revenue.

Any cell-based products that receive regulatory approval may be difficult and expensive to manufacture profitably.

Cell-based products are among the more expensive biological products to manufacture in accordance with cGMP. We do not yet have sufficient information to reliably estimate the cost of commercially manufacturing any of our product candidates. Excessive manufacturing costs could make our product candidates too expensive to compete in the medical market place with alternative products manufactured by our competitors or might result in third party payors such as health insurers and Medicare, declining to cover our products or setting reimbursement levels too low for us to earn a profit from the commercialization of one or more of our products.

If we do not receive CE Mark approval for Renevia, we may not commercialize Renevia at all.

To provide our products in other countries we must obtain regulatory approvals and comply with the regulations of those countries, which may differ substantially from those of the U.S. The European Union (EU) requires that manufacturers of medical products obtain the right to affix the CE mark, for compliance with the Medical Device Directive (93/42/EEC), as amended, to their products before selling them in member countries of the EU. The CE mark is an international symbol of adherence to quality assurance standards and compliance with applicable European medical device directives. To obtain the authorization to affix the CE mark to products, a manufacturer must obtain certification that its processes and products meet certain European quality standards.

In March 2018, we submitted a design dossier for CE Mark for the use of Renevia® as a device to aid in transferring a patient’s own adipose tissue to treat certain forms of facial lipoatrophy, or fat loss. At time of submission, we anticipated CE Mark approval in the second half of 2018. We have been informed by our European regulatory body of an issue with limited resources and consequently, feedback on our submission has been significantly delayed. We currently expect to receive a final response on our submission in the second half of 2019. Because we have no commercial infrastructure, if we receive a CE Mark for Renevia we intend to seek a commercialization partner in the EU. However, we can give no assurance that we will receive CE Mark approval or secure a commercialization partner for Renevia. If we do not receive approval, we will not be able to commercialize Renevia in member countries of the EU or affiliated countries that accept the CE mark. Based on conversations with the FDA, we received feedback that Renevia would be considered a drug device combination and we would need to conduct a larger clinical development program that can reasonably be supported by the commercial opportunity for Renevia in facial lipoatrophy. Accordingly, if we do not receive CE Mark approval for Renevia, we may not commercialize Renevia at all.

We face potential product liability, and, if successful claims are brought against us, we may incur substantial liability and costs. If the use or misuse of our product candidates harm patients or is perceived to harm patients even when such harm is unrelated to our product candidates, our regulatory approvals could be revoked or otherwise negatively impacted, and we could be subject to costly and damaging product liability claims.

We face the risk of incurring liabilities to clinical trial patients if they are injured as a result of their participation in our clinical trials. If any claims are made and if liability can be established, the amount of any liability we or our affiliates may incur, could exceed any insurance coverage in effect, and the amount of the liability could be material to our financial condition.

The use or misuse of our product candidates in clinical trials and the sale of any products for which we obtain marketing approval exposes us to the risk of product liability claims. Product liability claims might be brought against us by consumers, healthcare providers, pharmaceutical companies or others selling or otherwise coming into contact with our products. There is a risk that our product candidates may induce adverse events. If we cannot successfully defend against product liability claims, we could incur substantial liability and costs. In addition, regardless of merit or eventual outcome, product liability claims may result in:

We believe our current product liability insurance coverage is appropriate in light of our clinical programs; however, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. If and when we obtain marketing approval for product candidates, we intend to increase our insurance coverage to include the sale of commercial products; however, we may be unable to obtain product liability insurance on commercially reasonable terms or in adequate amounts. Significant damages have been awarded in class action lawsuits based on drugs or medical treatments that had unanticipated adverse effects. A successful product liability claim or series of claims brought against us could cause our stock price to decline and, if the amount of damages exceeds our insurance coverage, could adversely affect our results of operations and business.

Cell Cure has received Israeli government grants for certain of its research and development activities. The terms of these grants may require Cell Cure to seek approvals and to satisfy specified conditions to manufacture products and transfer or license grant-supported technologies outside of Israel. In the context of such approvals, Cell Cure will be required to pay penalties in addition to the repayment of the grants. Such grants are applied for on a yearly basis and may not be available or only partially granted in the future, which would increase our costs.

Cell Cure has received Israeli government grants for certain of its research and development activities. The terms of these grants require prior approval and the satisfaction of specified conditions to manufacture products and transfer or license technologies outside of Israel.

Under the Encouragement of Research, Development and Technological Innovation in the Industry Law 5744-1984 (formerly known as the Law for the Encouragement of Research and Development in Industry 5744-1984), and the regulations, guidelines, rules, procedures and benefit tracks thereunder (collectively, the “Innovation Law”), annual research and development programs that meet specified criteria and are approved by a committee of the IIA are eligible for grants. The grants awarded are typically up to 50% of the project’s expenditures, as determined by the IIA committee and subject to the benefit track under which the grant was awarded. A company that receives a grant from the IIA (a “Grant Recipient”), is typically required to pay royalties to the IIA on income generated from products incorporating know-how developed using such grants (including income derived from services associated with such products) or on all revenues of the Grant Recipient (depending upon the terms of the approval letters issued by the IIA), until 100% of the U.S. dollar-linked grant plus annual LIBOR interest is repaid. In general, the rate of such royalties varies between 3% to 5%.

The obligation to pay royalties is contingent on actual revenues being generated from such products and services or actual revenues being generated by the Grant Recipient in general (as the case may be). In the absence of such revenues, no payment of royalties is required. It should be noted that the restrictions under the Innovation Law will continue to apply even after the repayment of such royalties in full by the Grant Recipient including restrictions on the sale, transfer or licensing to a foreign entity of know-how developed as part of the programs under which the grants were given.

The terms of the grants under the Innovation Law also (generally) require that the products developed as part of the programs under which the grants were given be manufactured in Israel and that the know-how developed thereunder may not be transferred outside of Israel, unless prior written approval is received from the IIA (such approval is not required for the transfer of a portion of the manufacturing capacity which does not exceed, in the aggregate, 10% of the portion declared to be manufactured outside of Israel in the applications for funding (in which case only notification is required), and additional payments are required to be made to IIA). It should be noted that this does not restrict the export of products that incorporate the funded know-how.

The Innovation Law restricts the ability to transfer or license know-how funded by IIA outside of Israel. Transfer of IIA-funded know-how outside of Israel requires prior approval and is subject to approval and payment of a redemption fee to the IIA calculated according to the relevant formulas provided under the Innovation Law. A transfer or license for the purpose of the Innovation Law are generally interpreted very broadly and include, inter alia, any actual sale or assignment of the IIA-funded know-how, any license to further develop or otherwise exploit the IIA-funded know-how or the products resulting from such IIA-funded know-how or any other transaction, which, in essence, constitutes a transfer of the IIA-funded know-how. Generally, a mere license solely to market or distribute products resulting from the IIA-funded know-how would not be deemed a transfer or license for the purpose of the Innovation Law.

Part of Cell Cure’s research and development efforts have been financed, partially, through grants that it has received from the IIA and when we acquired our holdings in Cell Cure, we undertook in writing, vis-à-vis the IIA, to abide by, and to ensure the abidance of Cell Cure to, the Innovation Law. We therefore must comply with the requirements of the Innovation Law and related regulations. As of December 31, 2018, we received approximately $13 million of such grants. The restrictions under the Innovation Law may impair our ability to enter into agreements which involve IIA-funded products or know-how without the approval of IIA. We cannot be certain that any approval of IIA will be obtained on terms that are acceptable to us, or at all. We may not receive the required approvals should we wish to transfer or license IIA-funded know-how, manufacturing and/or development outside of Israel in the future. Furthermore, in the event that we undertake a transaction involving the transfer to a non-Israeli entity of know-how developed with IIA-funding pursuant to a merger or similar transaction, the consideration available to our shareholders may be reduced by the amounts we are required to pay to the IIA. Any approval, if given, will generally be subject to additional financial obligations. Failure to comply with the requirements under the Innovation Law may subject Cell Cure to mandatory repayment of grants received by it (together with interest and penalties), as well as expose its directors and management to criminal proceedings. In addition, the IIA may from time to time conduct royalty audits. Further grants may not be approved or reduced in the future, which would increase our costs. IIA approval is not required for the marketing or distribution of products resulting from the IIA-funded research or development in the ordinary course of business.

Our international business exposes us to business, regulatory, political, operational, financial and economic risks associated with doing business outside of the United States.

Cell Cure is our 99% owned subsidiary located in Jerusalem, Israel. OpRegen is currently manufactured at Cell Cure and we anticipate transitioning some or all of the manufacturing of OPC1 and VAC2 to Cell Cure as well. A portion of our OpRegen Phase I/IIa clinical trial has been conducted at sites in Israel. Conducting operations internationally involves a number of risks, including:

Any of these factors could significantly harm our international operations and, consequently, our results of operations. In addition, any failure to comply with applicable legal and regulatory obligations could impact us in a variety of ways that include, but are not limited to, significant criminal, civil and administrative penalties, including imprisonment of individuals, fines and penalties, denial of export privileges, seizure of shipments, and restrictions on certain business activities. Also, the failure to comply with applicable legal and regulatory obligations could result in the disruption of our clinical trial activities.

Our international operations could be affected by changes in laws, trade regulations, labor and employment regulations, and procedures and actions affecting approval, production, pricing, reimbursement and marketing of tests, as well as by inter-governmental disputes. Any of these changes could adversely affect our business.

Our success internationally will depend, in part, on our ability to develop and implement policies and strategies that are effective in anticipating and managing these and other risks in Israel. Failure to manage these and other risks may have a material adverse effect on our operations in Israel and on our business as a whole.

Risks Related to our Intellectual Property

Our intellectual property may be insufficient to protect our products.

Our patents and patent applications are directed to compositions of matter, formulations, methods of use and/or methods of manufacturing, as appropriate. In addition to patenting our own technology and that of our subsidiaries, we have licensed patents and patent applications for certain stem cell technology, hEPC, and hES cell lines, hydrogel technology, and other technology from other companies.

The patent positions of pharmaceutical and biotechnology companies, including ours, are generally uncertain and involve complex legal and factual questions. Our business could be negatively impacted by any of the following:

In addition, others may independently develop similar or alternative technologies, duplicate any of our technologies and, if patents are licensed or issued to us, design around the patented technologies licensed to or developed by us. As an example, Astellas’ patent portfolio with respect to the manufacture of its RPE products could adversely impact our rights to manufacture OpRegen. Moreover, we could incur substantial costs in litigation if we have to defend ourselves in patent lawsuits brought by third parties or if we initiate such lawsuits.

In Europe, there is uncertainty about the eligibility of hES cell subject matter for patent protection. The European Patent Convention prohibits the granting of European patents for inventions that concern “uses of human embryos for industrial or commercial purposes.” A recent decision at the Court of Justice of the European Union interpreted parthenogenetically produced hES cells as patentable subject matter. Consequently, the European Patent Office now recognizes that human pluripotent stem cells (including human ES cells) can be created without a destructive use of human embryos as of June 5, 2003, and patent applications relating to hES cell subject matter with a filing and priority date after that date are no longer automatically excluded from patentability under Article 53 (a) EPC and Rule 28(c) EPC.

If we are unable to obtain and enforce patents and to protect our trade secrets, others could use our technology to compete with us, which could limit opportunities for us to generate revenues by licensing our technology and selling products.

Our success will depend in part on our ability to obtain and enforce patents and maintain trade secrets in the United States and in other countries. If we are unsuccessful at obtaining and enforcing patents, our competitors could use our technology and create products that compete with our products, without paying license fees or royalties to us. The preparation, filing, and prosecution of patent applications can be costly and time consuming. Our limited financial resources may not permit us to pursue patent protection of all of our technology and products in all key markets. Even if we are able to obtain issued patents covering our technology or products, we may have to incur substantial legal fees and other expenses to enforce our patent rights to protect our technology and products from infringing uses. We may not have the financial resources to finance the litigation required to preserve our patent and trade secret rights. Litigation, interferences, oppositions, inter partes reviews or other proceedings are, have been and may in the future be necessary in some instances to determine the validity and scope of certain of our proprietary rights, and in other instances to determine the validity, scope or non-infringement of certain patent rights claimed by third parties to be pertinent to the manufacture, use or sale of our products. This means that patents owned or licensed by us may be lost if the outcome of a proceeding is unfavorable to us.

There is no certainty that our pending or future patent applications will result in the issuance of patents.

Our success depends in part on our ability to obtain and defend patent and other intellectual property rights that are important to the commercialization of our products and product candidates. The degree of patent protection that will be afforded to our products and processes in the U.S. and in other important markets remains uncertain and is dependent upon the scope of protection decided upon by the patent offices, courts, administrative bodies and lawmakers in these countries. We can provide no assurance that we will successfully obtain or preserve patent protection for the technologies incorporated into our products and processes, or that the protection obtained will be of sufficient breadth and degree to protect our commercial interests in all countries where we conduct business. If we cannot prevent others from exploiting our inventions, we will not derive the benefit from them that we currently expect. Furthermore, we can provide no assurance that our products will not infringe patents or other intellectual property rights held by third parties.

In Europe, there is uncertainty about the eligibility of hES cell subject matter for patent protection. The European Patent Convention prohibits the granting of European patents for inventions that concern “uses of human embryos for industrial or commercial purposes.” A recent decision at the Court of Justice of the European Union interpreted parthenogenetically produced hES cells as patentable subject matter. Consequently, the European Patent Office now recognizes that human pluripotent stem cells (including human ES cells) can be created without a destructive use of human embryos as of June 5, 2003, and patent applications relating to hES cell subject matter with a filing and priority date after this date are no longer automatically excluded from patentability under Article 53 (a) EPC and Rule 28(c) EPC.

Intellectual property we may develop using grants received from governments are subject to rights maintained by those governments.

Research and development we perform that is funded by grants from government, and any intellectual property that we create using those grants, is subject to certain rights of the government entities to require that we license or grant rights to the intellectual property developed using government funding in certain circumstances.

There is no certainty that we will be able to obtain licenses to intellectual property rights owned by third-parties.

There are no assurances that any of our intellectual property rights will guarantee protection or market exclusivity for our products and product candidates. In such cases, we may need to obtain enabling licenses from third parties to protect our products and product candidates, try to secure market exclusivity or avoid infringing on the intellectual property rights of third parties. If we are unable to fully protect our product candidates or achieve market exclusivity for our products and product candidates, our financial success will be dependent, in part, on our ability to protect and enforce our intellectual property rights, to operate without infringing upon the proprietary rights of others, or, when necessary, our ability to obtain enabling licenses.

If we fail to meet our obligations under license agreements, we may lose our rights to key technologies on which our business depends.

Our business depends on several critical technologies that are based in part on technology licensed from third parties. Those third-party license agreements impose obligations on us, including payment obligations and obligations to pursue development of commercial products under the licensed patents or technology. If a licensor believes that we have failed to meet our obligations under a license agreement, the licensor could seek to limit or terminate our license rights, which could lead to costly and time-consuming litigation and, potentially, a loss of the licensed rights. During the period of any such litigation, our ability to carry out the development and commercialization of potential products, and our ability to raise any capital that we might then need, could be significantly and negatively affected. If our license rights were restricted or ultimately lost, we would not be able to continue to use the licensed technology in our business.

Risks Related to our Dependence on Third Parties

We may become dependent on possible future collaborations to develop and commercialize many of our product candidates and to provide the regulatory compliance, sales, marketing and distribution capabilities required for the success of our business.

We may enter into various kinds of collaborative research and development and product marketing agreements to develop and commercialize our products. The expected future milestone payments and cost reimbursements from collaboration agreements could provide an important source of financing for our research and development programs, thereby facilitating the application of our technology to the development and commercialization of our products, but there are risks associated with entering into collaboration arrangements.

There is a risk we could become dependent upon one or more collaborative arrangements. A collaborative arrangement upon which we might depend might be terminated by our collaboration partner or a partner might determine not to actively pursue the development or commercialization of our products. A collaboration partner also may not be precluded from independently pursuing competing products and drug delivery approaches or technologies.

There is a risk that a collaboration partner might fail to perform its obligations under the collaborative arrangements or may be slow in performing its obligations. In addition, a collaboration partner may experience financial difficulties at any time that could prevent it from having available funds to contribute to the collaboration. If a collaboration partner fails to conduct its product development, commercialization, regulatory compliance, sales and marketing or distribution activities successfully and in a timely manner, or if it terminates or materially modifies its agreements with us, the development and commercialization of one or more product candidates could be delayed, curtailed or terminated because we may not have sufficient financial resources or capabilities to continue such development and commercialization on our own.

We do not have the ability to independently conduct clinical trials required to obtain regulatory approvals for our product candidates.

We will need to rely on third parties, such as contract research organizations, data management companies, contract clinical research associates, medical institutions, clinical investigators and contract laboratories to conduct any clinical trials we may undertake for our product candidates. We may also rely on third parties to assist with preclinical development of our product candidates. If we outsource clinical trials, we may not directly control the timing, conduct and expense of our clinical trials. If we enlist third parties to conduct clinical trials and they fail to perform their contractual duties or regulatory obligations or fail to meet expected deadlines, if they need to be replaced or if the quality or accuracy of the data they obtain is compromised due to failing to adhere to our clinical protocols or regulatory requirements or for other reasons, our preclinical development activities or clinical trials may be extended, delayed, suspended or terminated, and we may not obtain regulatory approval for or successfully commercialize our product candidates.

We have relied on CIRM to fund past clinical trials of OPC1 and we do not know if they will provide additional funding for future studies of OPC1.

We have received $14 million of funding from CIRM to support clinical development of OPC1. We intend to apply for additional CIRM grants, however, we cannot provide any assurance that such grants will be awarded. If we are unable to obtain another CIRM grant, we will need to raise funds through other mechanisms to support future clinical studies of OPC1, which may take additional time and effort. If capital is not immediately available, this may force us to amend, delay, or discontinue the clinical trial and development work for OPC1 until funding is secured.

We may need to rely on marketing partners or contract sales companies.

If we are able to develop our product candidates and obtain necessary regulatory approvals, we may need to rely on marketing, selling or distributing partner. If we do not partner for commercial services, we will depend on our ability to build our own marketing, selling and distribution capabilities, which would require the investment of significant financial and management resources, or we will need to find collaborative marketing partners, sales representatives or wholesale distributors for the commercial sale of our products.

If we market products through arrangements with third parties, we may pay sales commissions to sales representatives or we may sell or consign products to distributors at wholesale prices. As a result, our gross profit from product sales may be lower than it would be if we sold our products directly to end users at retail prices through our own sales force. There can be no assurance we will able to negotiate distribution or sales agreements with third parties on favorable terms to justify our investment in our products or achieve sufficient revenues to support our operations.

Risks Pertaining to Our Common Shares

Because we are engaged in the development of pharmaceutical and stem cell therapy products, the price of our common shares may rise and fall rapidly.

The market price of our common shares, like that of the shares of many biotechnology companies, has been highly volatile. The price of our common shares may rise rapidly in response to certain events, such as the commencement of clinical trials of an experimental new therapy or diagnostic test, even though the outcome of those trials and the likelihood of ultimate FDA approval of a therapeutic product remain uncertain. Similarly, prices of our common shares may fall rapidly in response to certain events such as unfavorable results of clinical trials or a delay or failure to obtain FDA approval. The failure of our earnings to meet analysts’ expectations could result in a significant rapid decline in the market price of our common shares.

Current economic and stock market conditions may adversely affect the price of our common shares.

The stock market has been experiencing extreme price and volume fluctuations which have affected the market price of the equity securities without regard to the operating performance of the issuing companies. Broad market fluctuations, as well as general economic and political conditions, may adversely affect the market price of our common shares.

The market price of our common shares may decline in the future as a result of the Asterias merger.

The market price of our common shares may decline in the future as a result of the Asterias merger for a number of reasons, including if the integration of both companies is unsuccessful or if we fail to achieve the perceived benefits of the merger, including financial results, as rapidly as or to the extent anticipated by financial or industry analysts. These factors are, to some extent, beyond our control.

Because we do not pay dividends, our common shares may not be a suitable investment for anyone who needs to earn dividend income.

We do not pay cash dividends on our common shares. For the foreseeable future, we anticipate that any earnings generated in our business will be used to finance the growth of our business and will not be paid out as dividends to holders of our common shares. This means that our common shares may not be a suitable investment for anyone who needs to earn income from their investments.

Insiders continue to have substantial control over our company, which could limit your ability to influence the outcome of key transactions, including a change of control.

Our directors, executive officers and their affiliates, in the aggregate, owned approximately 32% of the outstanding shares of our common stock as of December 31, 2018. As a result, these shareholders, if acting together, will be able to influence or control matters requiring approval by our shareholders, including the election of directors and the approval of mergers, acquisitions or other extraordinary transactions. They may also have interests that differ from yours and may vote in a way with which you disagree, and which may be averse to your interests. This concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deter certain public investors from purchasing our common stock and might ultimately affect the market price of our common stock.

Securities analysts may not initiate coverage or continue to cover our common shares, and this may have a negative impact on the market price of our common shares.

The trading market for our common shares will depend, in part, on the research and reports that securities analysts publish about our business and our common shares. We do not have any control over these analysts. There is no guarantee that securities analysts will cover our common shares. If securities analysts do not cover our common shares, the lack of research coverage may adversely affect the market price of those shares. If securities analysts do cover our common shares, they could issue reports or recommendations that are unfavorable to the price of our common shares, and they could downgrade a previously favorable report or recommendation, and in either case our share prices could decline as a result of the report. If one or more of these analysts does not initiate coverage, ceases to cover our common shares or fails to publish regular reports on our business, we could lose visibility in the financial markets, which could cause our share prices or trading volume to decline.

If we or our subsidiaries issue additional common shares or preferred shares, investors in our common shares may experience dilution of their ownership interests.

We and our subsidiaries may issue additional common shares or other securities convertible into or exercisable for common shares to raise additional capital or to hire or retain employees or consultants, or in connection with future acquisitions of companies or licenses to technology or rights, or for other business purposes. The future issuance of additional securities may be dilutive to our shareholders and may create downward pressure on the trading price of our common stock.

We are currently authorized to issue an aggregate of 252,000,000 shares of capital stock consisting of 250,000,000 common shares and 2,000,000 “blank check” preferred shares, which means we may issue, without stockholder approval, one or more series of preferred stock having such designation, powers, privileges, preferences, including preferences over our common stock respecting dividends and distributions, terms of redemption and relative participation, optional, or other rights, if any, of the shares of each such series of preferred stock and any qualifications, limitations or restrictions thereof, as our board of directors may determine. The terms of one or more series of preferred stock could dilute the voting power or reduce the value of our common stock. Any preferred shares may also be convertible into common shares on terms that would be dilutive to holders of common shares. Our subsidiaries may also issue their own preferred shares with a similar impact on our ownership of the subsidiaries.

As of December 31, 2018, we had 127,135,774 common shares outstanding, 13,867,000 common shares reserved for issuance upon the exercise of outstanding options under our employee stock option plans; and 402,000 common shares reserved for issuance upon the lapse of restricted stock units (RSUs) under our equity incentive plan.

The operation of some of our subsidiaries has been financed in part through the sale of shares of capital stock and warrants to purchase securities of those subsidiaries to private investors. Future sales of such securities by our subsidiaries could reduce our ownership interest in the applicable subsidiary, and correspondingly dilute our shareholder’s ownership interests in our consolidated enterprise. Certain of our subsidiaries also have their own stock option plans and the exercise of stock options or the sale of restricted stock under those plans would also reduce our ownership interest in the applicable subsidiary, with a resulting dilutive effect on the ownership interest of our shareholders in our consolidated enterprise.

The market price of our common shares could be impacted by the terms of financings by our subsidiaries.

The operation of some of our subsidiaries has been financed in part through the sale of shares of capital stock and warrants to purchase securities of those subsidiaries to private investors. The prices at which our subsidiaries may sell shares of their capital stock in the future could impact the value of our company as a whole and could impact the price at which our common shares trade in the market. A sale of capital stock of one of our subsidiaries at a price that the market perceives as low could adversely impact the market price of our common shares. Even if our subsidiaries sell their capital stock at prices that reflect arm’s length negotiation with investors, there is no assurance that those prices will reflect a true fair market value or that the ascribed value of the subsidiaries based on those share prices will be fully reflected in the market value of our common shares.

Our net income or loss will be impacted by changes in the market value of OncoCyte common stock.

Because we use the equity method of accounting for the common stock of OncoCyte that we hold at fair value, we will recognize gain or loss to the extent that the market value of OncoCyte common stock changes from calendar quarter to calendar quarter, regardless of whether we sell any of those shares.

None

Generally

In general, we believe that our properties are well-maintained, adequate and suitable for their current requirements and for our operations in the foreseeable future. See the Notes to Consolidated Financial Statements – Note 15. Commitments and Contingencies included elsewhere in this Report.

BioTime Facilities

Our principal offices and laboratory facilities comprise 30,795 square feet in two buildings in Alameda, California. AgeX, ReCyte Therapeutics, OrthoCyte, and OncoCyte share this space with us and it is where OncoCyte plans to operate its CLIA lab.

Cell Cure Facilities

Cell Cure leases 728.5 square meters (approximately 7,842 square feet) of office and laboratory space in the Bio Park on the campus of the Hadassah University Hospital in Jerusalem, Israel under a lease that expires on December 31, 2020, with two options to extend the term for 5 years each.

In January 2018, Cell Cure entered into another lease for an additional 934 square meters (approximately 10,054 square feet) of office space in the same facility in Jerusalem, Israel under a lease that expires on December 31, 2025, with two options to extend the lease for 5 years each. The term of this lease commenced on April 1, 2018 and includes a leasehold improvement construction allowance of up to NIS 4,000,000 (approximately up to $1.1 million) from the landlord. The leasehold improvements were substantially completed by December 31, 2018 and the construction allowance was fully utilized.

From time to time, we are subject to legal proceedings and claims in the ordinary course of business. While management presently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not materially harm our financial position, cash flows, or overall trends in results of operations, legal proceedings are subject to inherent uncertainties, and unfavorable rulings or outcomes could occur that have individually or in aggregate, a material adverse effect on our business, financial condition or operating results. Except as described below, we are not currently subject to any pending material litigation, other than ordinary routine litigation incidental to our business, as described above.

On February 19, 2019, a putative class action lawsuit relating to the Asterias acquisition was filed on behalf of Asterias shareholders in the Superior Court of the State of California in the County of Alameda against, among other parties, Asterias, the members of Asterias’ board of directors, BioTime, Neal Bradsher, Broadwood Capital, Inc. and Broadwood Capital Partners, L.P. The lawsuit asserts claims for breach of fiduciary duty and aiding and abetting breach of fiduciary duty, alleging that the consideration Asterias shareholders are to receive in the merger is unfair, the merger is the product of an unfair process, and the joint proxy statement omits certain allegedly material information. The complaint seeks, injunctive relief or rescissory damages and an award of plaintiffs’ expenses and attorneys’ fees. The defendants specifically deny all allegations in the litigation, including that any additional disclosure was or is required and intend to defend it vigorously. To moot the disclosure claims in the complaint, Asterias and BioTime made supplemental disclosures to the joint proxy statement relating to the merger.

Not applicable.

PART II

Market Information

Our common stock trades on the NYSE American and on the Tel Aviv Stock Exchange under the ticker symbol BTX.

Holders

As of February 15, 2019, there were 16,538 holders of the common shares based on the share position listing.

Dividend Policy

We have not paid dividends on our common stock. We currently intend to retain any earnings for use in the operations of our business. We, therefore, do not anticipate paying cash dividends on our common stock in the foreseeable future.

Recent Sales of Unregistered Securities

Except as previously reported in our quarterly reports on Form 10-Q and current reports on Form 8-K filed with the Securities and Exchange Commission (“SEC”), during the year ended December 31, 2018, there were no unregistered sales of equity securities by us during the year ended December 31, 2018.

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Accordingly, we are not required to provide the information required by this item in this Report.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide information necessary to understand our audited consolidated financial statements for the two-year period ended December 31, 2018, 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 year ended December 31, 2018 as compared to the year ended December 31, 2017. This discussion should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Report. 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 Report, particularly in “Item 1A. Risk Factors.”

Overview

BioTime is a clinical-stage biotechnology company developing new cellular therapies for degenerative retinal diseases, neurological conditions associated with demyelination, and aiding the body in detecting and combating cancer. BioTime’s programs are based on its proprietary cell-based therapy platform and associated development and manufacturing capabilities. With this platform BioTime develops and manufactures specialized, terminally-differentiated human cells from our pluripotent and progenitor cell starting materials. These differentiated cells are developed either to replace or support cells that are dysfunctional or absent due to degenerative disease or traumatic injury, or administered as a means of helping the body mount an effective immune response to cancer.

BioTime has three cell therapy programs in clinical development:

BioTime also has cell/drug delivery programs that are based upon its proprietary HyStem^® cell and drug delivery matrix technology. HyStem^® was designed to support the formulation, transfer, retention, and engraftment of cellular therapies.

BioTime completed its merger with Asterias Biotherapeutics, Inc. on March 8, 2019, which incorporated OPC1 and VAC2 into its cell therapy product portfolio.

BioTime also has equity holdings in two publicly traded companies, OncoCyte Corporation (“OncoCyte”) (approximately 28% ownership) and AgeX Therapeutics, Inc. (“AgeX”) (approximately 5% ownership), which BioTime founded and, in prior years, were majority-owned and consolidated subsidiaries. OncoCyte (NYSE American: OCX) is developing confirmatory diagnostic tests for lung cancer utilizing novel liquid biopsy technology and AgeX is focused on the development of early-stage programs relating to cell immortality, regenerative biology, aging, and age-related diseases.

Critical Accounting Policies

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts in our consolidated financial statements and related notes. Our significant accounting policies are described in Note 2 to our consolidated financial statements included elsewhere in this Report. We have identified below our critical accounting policies and estimates that we believe require the greatest amount of judgment. On an ongoing basis, we evaluate estimates which are subject to significant judgment, including those related to going concern assessment of our consolidated financial statements, useful lives associated with long-lived assets, including evaluation of asset impairment, allowances for uncollectible accounts and financing receivables, valuing shares owned in nonconsolidated companies using the equity method of accounting, loss contingencies, deferred income taxes and tax reserves, including valuation allowances related to deferred income taxes, and assumptions used to value stock-based awards, debt or other equity instruments. Actual results could differ materially from those estimates. On an ongoing basis, we evaluate our estimates compared to historical experience and trends which form the basis for making judgments about the carrying value of assets and liabilities. To the extent that there are material differences between our estimates and our actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.

We believe the assumptions and estimates associated with the following have the greatest potential impact on our consolidated financial statements.

Going concern assessment – In accordance with ASU No. 2014-15 Presentation of Financial Statements – Going Concern, we assess going concern uncertainty in our consolidated financial statements to determine if we have sufficient cash and cash equivalents on hand and working capital to operate for a period of at least one year from the date our consolidated financial statements are issued or are available to be issued, which is referred to as the “look-forward period” as defined by ASU No. 2014-15. As part of this assessment, based on conditions that are known and reasonably knowable to us, we will consider various scenarios, forecasts, projections, and estimates, and we will make certain key assumptions, including the timing and nature of projected cash expenditures or programs, and our ability to delay or curtail those expenditures or programs, if necessary, among other factors. Based on this assessment, as necessary or applicable, we make certain assumptions concerning our ability to curtail or delay research and development programs and expenditures to the extent we deem probable those implementations can be achieved and we have the proper authority to execute them within the look-forward period in accordance with ASU No. 2014-15.

Adoption of ASU 2014-09, Revenues from Contracts with Customers (Topic 606) – During May 2014, the FASB issued ASU 2014-09 (“Topic 606”) Revenue from Contracts with Customers which supersedes the revenue recognition requirements in Topic 605 Revenue Recognition (“Topic 605”). Topic 606 describes principles an entity must apply to measure and recognize revenue and the related cash flows, using the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligation(s) in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. Topic 606 core principle is that it requires entities to recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services.

BioTime adopted Topic 606 as of January 1, 2018 using the modified retrospective transition method applied to those contracts which were not completed as of the adoption date. Results for reporting periods beginning on January 1, 2018 and thereafter are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with BioTime’s historic revenue recognition accounting under Topic 605.

On January 1, 2018, the adoption and application of Topic 606 resulted in an immaterial cumulative effect adjustment of BioTime’s beginning consolidated accumulated deficit balance. In the applicable paragraphs below, BioTime has summarized its revenue recognition policies for its various revenue sources in accordance with Topic 606.

Research and development contracts with customers – In its agreements with customers, BioTime’s performance obligations of research and development are completed as services are performed and control passes to the customer, and accordingly revenues are recognized over time. BioTime generally receives a fee at the inception of an agreement, with variable fees, if any, tied to certain milestones, if achieved. BioTime estimates this variable consideration using a single most likely amount. Based on historical experience, there has been no variable consideration related to milestones included in the transaction price due to the significant uncertainty of achieving contract milestones and milestones not being met. If a milestone is met, subsequent changes in the single most likely amount may produce a different variable consideration, and BioTime will allocate any subsequent changes in the transaction price on the same basis as at contract inception. Amounts allocated to a satisfied performance obligation will be recognized as revenue in the period in which the transaction price changes with respect to variable consideration, which could result in a reduction of revenue. Contracts of this kind are typically for a term greater than one year. For each of the years ended December 31, 2018 and 2017, BioTime recognized $308,000 for such services included in the consolidated royalties from product sales and license fees. There were no deferred revenues related to unsatisfied performance obligations in the consolidated balance sheet as of December 31, 2018. As of December 31, 2018, BioTime had not met any milestones that would require adjustment of the transaction price.

Royalties from product sales and license fees – BioTime’s performance obligations in agreements with certain customers is to provide a license to allow customers to make, import and sell company licensed products or methods for pre-clinical studies and commercial use. Customers pay a combination of a license issue fee paid up front and a sales-based royalty, if any, in some cases with yearly minimums. The transaction price is deemed to be the license issue fee stated in the contract. The license offered by BioTime is a functional license with significant standalone functionality and provides customers with the right to use BioTime’s intellectual property. This allows BioTime to recognize revenue on the license issue fee at a point in time at the beginning of the contract, which is when the customer begins to have use of the license. Variable consideration related to sales-based royalties is recognized only when (or as) the later of one or more of the following events occur: (a) a sale or usage occurs, or (b) the performance obligation to which some, or all, of the sales-based or usage-based royalty that has been allocated and has been satisfied or partially satisfied. Due to the contract termination clauses, BioTime does not expect to receive all of the minimum royalty payments throughout the term of the agreements. Therefore, BioTime fully constrains recognition of the minimum royalty payments as revenues until its customers are obligated to pay, which is generally within 60 days prior to the beginning of each year the minimum royalty payments are due. For the years ended December 31, 2018 and 2017, royalty revenues were immaterial.

Sale of research products and services – Revenues from the sale of research products and services are primarily derived from the sale of hydrogels and stem cell products for research use and are recognized when earned. These revenues are recognized at a point-in-time when control of the product transfers to the customer, which is typically upon shipment to the customer from the Alameda facility. Cost of sales from the sale of research products include direct and indirect overhead expenses incurred to purchase and manufacture those products, including lab supplies, personnel costs, freight, and royalties paid, if any, in accordance with the terms of applicable licensing agreements for those products.

Subscription and advertisement revenues – LifeMap Sciences, now a direct majority-owned subsidiary of AgeX, sells subscription-based products, including research databases and software tools, for biomedical, gene, disease, and stem cell research. LifeMap Sciences sells these subscriptions primarily through the internet to biotech and pharmaceutical companies worldwide. LifeMap Sciences’ principal subscription product is the GeneCards^® Suite, which includes the GeneCards^® human gene database, and the MalaCards™ human disease database.

LifeMap Sciences’ performance obligations for subscriptions include a license of intellectual property related to its genetic information packages and premium genetic information tools. These licenses are deemed functional licenses that provide customers with a “right to access” to LifeMap Sciences’ intellectual property during the subscription period and, accordingly, revenue is recognized over a period of time, which is generally the subscription period. Payments are typically received at the beginning of a subscription period and revenue is recognized according to the type of subscription sold.

For subscription contracts in which the subscription term commences before a payment is due, LifeMap Sciences records an accounts receivable as the subscription is earned over time and bills the customer according to the contract terms. LifeMap Sciences continuously monitors collections and payments from customers and maintains a provision for estimated credit losses and uncollectible accounts based upon its historical experience and any specific customer collection issues that have been identified. Amounts determined to be uncollectible are written off against the allowance for doubtful accounts. LifeMap Sciences has not historically provided significant discounts, credits, concessions, or other incentives from the stated price in the contract as the prices are offered on a fixed fee basis for the type of subscription package being purchased. LifeMap Sciences may issue refunds only if the packages cease to be available for reasons beyond its control. In such an event, the customer will get a refund on a pro-rata basis. Using the most likely amount method for estimating refunds under Topic 606, including historical experience, LifeMap Sciences determined that the single most likely amount of variable consideration for refunds is immaterial as LifeMap Sciences does not expect to pay any refunds. Both the customer and LifeMap Sciences expect the subscription packages to be available during the entire subscription period, and LifeMap Sciences has not experienced any significant issues with the availability of the product and has not issued any material refunds.

LifeMap Sciences performance obligations for advertising are overall advertising services and represent a series of distinct services. Contracts are typically less than a year in duration and the fees charged may include a combination of fixed and variable fees with the variable fees tied to click throughs to the customer’s products on their website. LifeMap Sciences allocates the variable consideration to each month the click through services occur and allocates the annual fee to the performance obligation period of the initial term of the contract because those amounts correspond to the value provided to the customer each month. For click-through advertising services, at the time the variable compensation is known and determinable, the service has been rendered. Revenue is recognized at that time. The annual fee is recognized over the initial subscription period because this is a service and the customer simultaneously receives and consumes the benefit of LifeMap Sciences’ performance.

LifeMap Sciences deferred subscription revenues primarily represent subscriptions for which cash payment has been received for the subscription term, but the subscription term has not been completed as of the balance sheet date reported. Beginning on August 30, 2018, there are no revenues or cost of sales recorded from subscription and advertisement products because of the AgeX Deconsolidation. The LifeMap Sciences revenues presented for the year ended December 31, 2018 are for revenues earned through August 29, 2018, the date immediately preceding the AgeX Deconsolidation.

Grant revenues – In applying the provisions of Topic 606, BioTime has determined that government grants are out of the scope of Topic 606 because the government entities do not meet the definition of a “customer”, as defined by Topic 606, as there is not considered to be a transfer of control of good or services to the government entities funding the grant. BioTime has, and will continue to, account for grants received to perform research and development services in accordance with ASC 730-20, Research and Development Arrangements, which requires an assessment, at the inception of the grant, of whether the grant is a liability or a contract to perform research and development services for others. If BioTime or a subsidiary receiving the grant is obligated to repay the grant funds to the grantor regardless of the outcome of the research and development activities, then BioTime is required to estimate and recognize that liability. Alternatively, if BioTime or a subsidiary receiving the grant is not required to repay, or if it is required to repay the grant funds only if the research and development activities are successful, then the grant agreement is accounted for as a contract to perform research and development services for others, in which case, grant revenue is recognized when the related research and development expenses are incurred.

Deferred grant revenues represent grant funds received from the governmental funding agencies for which the allowable expenses have not yet been incurred as of the balance sheet date reported.

Arrangements with multiple performance obligations – BioTime’s contracts with customers may include multiple performance obligations. For such arrangements, BioTime allocates revenue to each performance obligation based on its relative standalone selling price. BioTime generally determines or estimates standalone selling prices based on the prices charged, or that would be charged, to customers for that product or service. As of, and for the year ended, December 31, 2018, BioTime did not have significant arrangements with multiple performance obligations.

Equity method accounting for Asterias and OncoCyte, at fair value – We use the equity method of accounting when we have the ability to exercise significant influence, but not control, as determined in accordance with GAAP, over the operating and financial policies of a company in which we hold an equity interest. For equity method investments, which we have elected to measure at fair value, unrealized gains and losses are reported in the consolidated statements of operations as a nonoperating gain or loss from equity method investments included in other income and expenses, net. See Notes 6 and 7 to our consolidated financial statements included elsewhere in this Report.

Long-lived intangible assets – Long-lived intangible assets, consisting primarily of acquired patents, patent applications, and licenses to use certain patents are stated at acquired cost, less accumulated amortization. Amortization expense is computed using the straight-line method over the estimated useful lives of the assets, generally over 10 years.

Impairment of long-lived assets – Our long-lived assets, including long-lived intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If an impairment indicator is present, we evaluate recoverability by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. If the assets are impaired, the impairment recognized is measured by the amount by which the carrying amount exceeds the estimated fair value of the assets.

Research and development – Research and development expenses consist of costs incurred for company-sponsored, collaborative and contracted research and development activities. These costs include direct and research-related overhead expenses including compensation and related benefits, stock-based compensation, consulting fees, research and laboratory fees, rent of research facilities, amortization of intangible assets, and license fees paid to third parties to acquire patents or licenses to use patents and other technology. We expense research and development costs as incurred. Research and development expenses incurred and reimbursed by grants from third parties approximate the grant income recognized in the consolidated statements of operations.

Stock-based compensation – We follow accounting standards governing share-based payments, which require the measurement and recognition of compensation expense for all share-based compensation awards made to directors and employees, including employee stock options, based on estimated fair values. Upon adoption of ASU 2016-09 on January 1, 2017, forfeitures are accounted for as they occur instead of based on the number of awards that were expected to vest prior to adoption of ASU 2016-09. Based on the nature and timing of our grants, straight line expense attribution of stock-based compensation for the entire award and the relatively low forfeiture rates on BioTime’s experience, the impact of adoption of ASU 2016-09 pertaining to forfeitures was not material to our consolidated financial statements. We utilize the Black-Scholes option pricing model. Our determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, expected stock price volatility over the term of the awards, and the expected term of options granted, derived from 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.

Certain of our privately-held formerly consolidated subsidiaries have their own share-based compensation plans. For share-based compensation awards granted by those privately-held consolidated subsidiaries under their respective equity plans, which are included in our consolidated financial statements and results of operations for the years presented, we determined the expected stock price volatility using historical prices of comparable public company’s common stock for a period equal to the expected term of the options. The expected term of those privately-held company options is based upon the “simplified method” provided under Staff Accounting Bulletin, Topic 14, or SAB Topic 14. The fair value of the shares of common stock underlying the stock options of these privately-held formerly consolidated subsidiaries is determined by the Board of Directors of those subsidiaries, as applicable, which is also used to determine the exercise prices of those stock options at the time of grant.

Although the fair value of employee stock options is determined in accordance with FASB guidance, changes in the assumptions can materially affect the estimated value and therefore the amount of compensation expense recognized in the consolidated financial statements.

In management’s opinion, the existing valuation models may not provide an accurate measure of the fair value of employee stock options because the option-pricing model value may not be indicative of the fair value that would be established in a willing buyer/willing seller market transaction.

Income taxes – We account for income taxes in accordance with ASC 740, Income Taxes, 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. ASC 740 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 benefits to be recognized, a tax position must be more-likely-than-not sustainable upon examination by taxing authorities. We file a U.S. federal income tax return as well as various state and foreign income tax returns. Our judgments regarding future taxable income may change over time due to changes in market conditions, changes in tax laws, tax planning strategies or other factors. If our assumptions, and consequently the estimates, change in the future with respect to our own deferred tax assets and liabilities, the valuation allowance may be increased or decreased, which may have a material impact on our consolidated financial statements. We recognize accrued interest and penalties related to unrecognized tax benefits, if any, as income tax expense, however, no amounts were accrued for the payment of interest and penalties as of December 31, 2018 and 2017.

On December 22, 2017, the United States enacted major federal tax reform legislation, Public Law No. 115-97, commonly referred to as the 2017 Tax Cuts and Jobs Act (“2017 Tax Act”), which enacted a broad range of changes to the Internal Revenue Code. Changes to taxes on corporations impacted by the 2017 Tax Act include, among others, lowering the U.S. federal tax rates to a 21% flat tax rate, elimination of the corporate alternative minimum tax (“AMT”), imposing additional limitations on the deductibility of interest and net operating losses, allowing any net operating loss (“NOLs”) generated in tax years ending after December 31, 2017 to be carried forward indefinitely and generally repealing carrybacks, reducing the maximum deduction for NOL carryforwards arising in tax years beginning after 2017 to a percentage of the taxpayer’s taxable income, and allowing for the expensing of certain capital expenditures. The 2017 Tax Act also puts into effect a number of changes impacting operations outside of the United States including, but not limited to, the imposition of a one-time tax “deemed repatriation” on accumulated offshore earnings not previously subject to U.S. tax, and shifts the U.S taxation of multinational corporations from a worldwide system of taxation to a territorial system. ASC 740 requires the effects of changes in tax rates and laws on deferred tax balances (including the effects of the one-time transition tax) to be recognized in the period in which the legislation is enacted.

For 2017, LifeMap Sciences included a deemed repatriation of $227,000 in accumulated foreign earnings not previously subject to U.S. tax in federal income from LifeMap Sciences Ltd. The federal taxable income was offset by the LifeMap Sciences’ net operating loss carryforwards resulting in no federal income tax due.

Beginning in 2018, the 2017 Tax Act subjects a U.S. shareholder to tax on Global Intangible Low Tax Income (“GILTI”) earned by certain foreign subsidiaries. In general, GILTI is the excess of a U.S. shareholder’s total net foreign income over a deemed return on tangible assets. The provision further allows a deduction of 50 percent of GILTI; however, this deduction is limited by the company’s pre-GILTI U.S. income. For 2018, we incurred a net loss from foreign activity, accordingly there was no GILTI inclusion in U.S. income. Based on current interpretations under ASC 740, an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. We have elected to account for GILTI as a current period expense when incurred.

On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to provide guidance for companies that are not able to complete their accounting for the income tax effects of the 2017 Tax Act in the period of enactment. SAB 118 allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. We applied the guidance in SAB 118 when accounting for the enactment-date effects of the Tax Act in 2017 and throughout 2018. At December 31, 2018, we have completed our accounting for all the enactment-date income tax effects of the Tax Act. ASC 740 requires the effects of changes in tax rates and laws on deferred tax balances (including the effects of the one-time transition tax) to be recognized in the period in which the legislation is enacted (see Note 14 to our consolidated financial statements included elsewhere in this Report).

Principles of consolidation – Our consolidated financial statements include the accounts of our wholly-owned and majority-owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. The consolidated financial statements are presented in accordance with accounting principles generally accepted in the U.S. and with the accounting and reporting requirements of SEC Regulation S-X.

As further discussed in Notes 3 and 4 to the consolidated financial statements included elsewhere in this Report, on August 30, 2018, we consummated the sale of AgeX Shares to Juvenescence. Prior to the Juvenescence Transaction, Juvenescence owned 5.6% of AgeX’s issued and outstanding common stock. Upon completion of the Juvenescence Transaction, our ownership in AgeX decreased from 80.4% to 40.2% of AgeX’s issued and outstanding shares of common stock, and Juvenescence’s ownership in AgeX increased from 5.6% to 45.8% of AgeX’s issued and outstanding shares of common stock. As a result of the consummation of the Juvenescence Transaction on August 30, 2018, AgeX is no longer our subsidiary and, as of that date, we experienced a “loss of control” of AgeX, as defined by GAAP. Loss of control is deemed to have occurred when, among other things, a parent company owns less than a majority of the outstanding common stock of a subsidiary, lacks a controlling financial interest in the subsidiary, and is unable to unilaterally control the subsidiary through other means such as having, or being able to obtain, the power to elect a majority of the subsidiary’s Board of Directors based solely on contractual rights or ownership of shares representing a majority of the voting power of the subsidiary’s voting securities. All of these loss-of-control factors were present with respect to our ownership interest in AgeX as of August 30, 2018. Accordingly, we have deconsolidated AgeX’s consolidated financial statements and consolidated results from our consolidated financial statements.

As further discussed in Notes 5 and 6 to the consolidated financial statements included elsewhere in this Report, on February 17, 2017, we deconsolidated OncoCyte’s financial statements from our consolidated financial statements due to our “loss of control” of OncoCyte under GAAP. Accordingly, since February 17, 2017, we have accounted for the OncoCyte common stock we hold using the equity method of accounting at fair value. Although beginning on February 17, 2017, OncoCyte’s financial statements and results will no longer be part of our consolidated financial statements and results, the market value of the OncoCyte common stock we hold is reflected on our consolidated balance sheet and changes in the market value of those shares are reflected in our consolidated statements of operations, allowing our shareholders to evaluate the value of the OncoCyte portion of our business.

As further discussed in Notes 5 and 7 to our consolidated financial statements included elsewhere in this Report, effective May 13, 2016, we deconsolidated Asterias financial statements and results of operations due to our “loss of control” of Asterias under GAAP. Although beginning on May 13, 2016, Asterias’ financial statements and results will no longer be part of our consolidated financial statements and results presented in this Report, the market value of the Asterias common stock we hold is reflected on our consolidated balance sheet and changes in the market value of those shares are reflected in our consolidated statements of operations, allowing our shareholders to evaluate the value of the Asterias portion of our business.

As further discussed in Note 19 to our consolidated financial statements included elsewhere in this Report, effective March 8, 2019, we completed the Asterias Merger in which we acquired the approximate 61% remaining ownership interest in Asterias in a stock-for-stock acquisition. As of March 8, 2019, Asterias is our wholly-owned subsidiary, Asterias ceased to exist as a public company, and we will consolidate Asterias’ operations and results with our operations and results beginning on that date.

Results of Operations

Comparison of Years Ended December 31, 2018 and 2017

Revenues

The following table shows our revenues for the years ended December 31, 2018 and 2017 (amounts in thousands).

*Not meaningful.

The $1.5 million increase in our total revenues year-over-year was primarily due to a $1.9 million increase in our grant revenues, partially offset by the $0.7 million decrease in our subscription and advertising revenues.

Our subscription and advertising revenues, including certain service revenues, were generated entirely by LifeMap Sciences, AgeX’s majority-owned subsidiary and are included in our consolidated revenues for periods through August 29, 2018, the date before the AgeX Deconsolidation. The decrease in those revenues is due to the AgeX Deconsolidation on August 30, 2018. Due to the AgeX Deconsolidation, we do not expect to earn subscription and advertising revenues in future accounting periods.

Revenues from the sale of research products and services are primarily derived from service revenues and the sale of hydrogels and stem cell products, which we commenced selling again during the year ended December 31, 2018. Revenues were insignificant during 2017 principally as a result of the reduction of operations at LifeMap Solutions. During July 2017, LifeMap Solutions ceased conducting its mobile health software development application business and was dissolved on February 9, 2018.

The $0.1 million increase in cost of sales year-over-year was mainly attributable to an increase in the royalty rate effective January 1, 2018 for LifeMap Sciences, timing of cash received, and the related royalty obligation incurred for periods through August 29, 2018, and cost of sales incurred from the sale of hydrogels and stem cell products. Due to the AgeX Deconsolidation, we do not expect to incur costs of sales in the future with respect to subscription and advertising revenues or with respect to sales of research products by AgeX.

Operating Expenses

The following table shows our operating expenses for the years ended December 31, 2018 and 2017 (in thousands).

Research and development expenses

The $2.3 million decrease in our research and development expenses year-over-year was primarily attributable to: a decrease of $1.5 million in AgeX related programs, including LifeMap Sciences, due to the AgeX Deconsolidation on August 30, 2018; a decrease of $0.3 million in BioTime related program expenses, primarily related to the completion of the Renevia^® clinical trial in 2018; a decrease of $0.8 million from the nonrecognition of OncoCyte research and development expenses incurred after February 17, 2017 as a result of the OncoCyte Deconsolidation; and a decrease of $0.5 million in LifeMap Solutions expenses resulting from the cessation of its mobile health software development application business in July 2017. The decreases were partially offset by a nonrecurring $0.8 million expense incurred by AgeX on March 23, 2018 with respect to certain acquired in-process research and development assets that have no alternative future uses.

The following table shows the amounts and percentages of our total research and development expenses of $21.8 million and $24.0 million allocated to our primary research and development programs during the years ended December 31, 2018 and 2017, respectively (amounts in thousands).

General and administrative 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, costs of patent applications, prosecution and maintenance, stock exchange-related costs, depreciation expense, marketing costs, board fees, legal and accounting costs, and other miscellaneous expenses which are allocated to general and administrative expense.

The following table shows the amount and percentages of our total general and administrative expenses of $24.7 million and $19.9 million incurred and allocated to BioTime and our subsidiaries during the years ended December 31, 2018 and 2017, respectively (amounts in thousands).

The $4.8 million increase in general and administrative expense year-over-year was primarily attributable to: a $2.3 million increase due to management transition and other compensation related costs, including hiring costs for a new chief executive officer during September 2018; a $2.1 million increase in legal, audit and compliance costs related to the AgeX Distribution; and a $1.5 million increase in noncash stock-based compensation expense due to increases in equity award grants. These increases were offset to some extent by a $0.3 million decrease in AgeX related costs, including LifeMap Sciences, due to the AgeX Deconsolidation, and a $1.4 million decrease in combined general and administrative expenses related to OncoCyte and LifeMap Solutions, shown in the table above.

Other income and expenses, net

The following table shows the amount of other income and expenses, net, during the year ended December 31, 2018 and 2017 (in thousands):

Interest income and expense, net – During 2018, we incurred $0.2 million of interest expense, which was primarily related to interest on amortization of our lease liability, offset by $0.9 million of interest income principally earned from our Juvenescence promissory note and our money market funds. During 2017, we incurred $0.8 million of interest expense, which was primarily noncash interest expense on amortization of a discount on related party convertible debt, offset by $0.1 million of interest income. Interest income is primarily attributed to interest earned on cash and cash equivalents balances held in interest bearing accounts during the respective years.

Gain on sale of equity method investment in Ascendance - On March 23, 2018, Ascendance was acquired by a third party in a merger through which AgeX received approximately $3.2 million in cash for its shares of Ascendance common stock. AgeX recognized a $3.2 million gain on the sale of its equity method investment in Ascendance, which is included in other income and expenses, net, for the year ended December 31, 2018.

Gain on sale of our significant ownership interest in, and deconsolidation, of AgeX – On August 30, 2018, we sold 14.4 million shares of our AgeX common stock to Juvenescence Limited for $3.00 per share, or aggregate consideration of $43.2 million. Upon completion of the sale, our percentage ownership in AgeX decreased from 80.4% to 40.2% and Juvenescence’s percentage ownership in AgeX increased from 5.6% to 45.8%. As a result, on August 30, 2018, we experienced a loss of control of AgeX in accordance with GAAP and deconsolidated AgeX’s consolidated financial statements and consolidated results from ours. In connection with this transaction, we recorded a gain on deconsolidation of $78.5 million, which includes a gain on the sale of the AgeX shares of $39.2 million, during the year ended December 31, 2018, included in other income and expenses, net.

Unrealized loss on AgeX Shares – Beginning on August 30, 2018 through November 28, 2018, the completion of the AgeX Distribution, we held 40.2% of AgeX’s outstanding shares of common stock and accounted for those shares using the equity method of accounting at fair value. For the period from August 30, 2018 through November 28, 2018, we recorded an unrealized loss of $4.2 million due to the decrease in the AgeX stock price from August 30, 2018 to November 28, 2018, the date on which we completed the AgeX Distribution (see Note 4 to our consolidated financial statements included elsewhere in this Report). Immediately following the distribution, we owned 1.7 million shares of AgeX common stock, all of which we still own, and which represents approximately 4.8% of AgeX’s outstanding common stock as of December 31, 2018 and which shares we hold as marketable equity securities.

Gain on deconsolidation of OncoCyte – During the year ended December 31, 2017, we recorded a gain of $71.7 million in connection with the OncoCyte Deconsolidation on February 17, 2017.

Unrealized loss on OncoCyte Shares – We own 14.7 million shares of common stock of OncoCyte, or approximately 36.1% of the OncoCyte common stock outstanding as of December 31, 2018. 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 $20.3 million and $68.2 million as of December 31, 2018 and December 31, 2017, respectively, based on the $1.38 per share and $4.65 per share closing prices of OncoCyte common stock on the NYSE American on those respective dates, resulting in an unrealized loss of $47.9 million recorded in 2018. Our OncoCyte shares had a fair value of $68.2 million and $71.2 million as of as of December 31, 2017 and February 17, 2017, respectively, based on the $4.65 per share and $4.85 per share closing prices of OncoCyte common stock on the NYSE American on those respective dates, resulting in an unrealized loss of $2.9 million recorded in 2017.

Unrealized loss on Asterias Shares – We own 21.7 million shares of common stock of Asterias, or approximately 39.1% of Asterias outstanding common stock as of December 31, 2018. 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 $13.5 million and $48.9 million as of December 31, 2018 and December 31, 2017, respectively, based on the $0.62 per share and $2.25 per share closing prices of Asterias common stock on the NYSE American on those respective dates, resulting in an unrealized loss of $35.4 million recorded in 2018. Our Asterias shares had a fair value of $48.9 million and $100.0 million as of December 31, 2017 and December 31, 2016, respectively, based on the $2.25 per share and $4.60 per share closing prices of Asterias common stock on the NYSE American on those respective dates, resulting in an unrealized loss of $51.1 million recorded in 2017.

Unrealized gain on marketable equity securities – We account for the shares we hold in foreign equity securities in HBL and, the AgeX shares of common stock we hold beginning on November 28, 2018, as marketable equity securities, carried at fair market value on our consolidated balance sheet, with changes in fair market value included in other income and expenses, net, in our consolidated statements of operations. Prior to January 1, 2018 and the adoption of ASU 2016-01 discussed in Note 2 to our consolidated financial statements elsewhere in this Report, the HBL securities were called “available-for-sale securities” and unrealized holding gains and losses, including changes in foreign currency exchange rates, were reported in other comprehensive income or loss, net of tax, and were a component of the accumulated other comprehensive income or loss on the consolidated balance sheets. Beginning on January 1, 2018, in accordance with our adoption of ASU 2016-01, all gains and losses we generate each period due to changes in fair market value, including changes in foreign currency exchange rates, from the HBL equity securities are included in other income and expenses, net, in our consolidated statements of operations.

For the year ended December 31, 2018, we recorded an unrealized gain of $0.7 million due to the increase in fair market value of the HBL marketable equity securities from January 1, 2018 to December 31, 2018. For the year ended December 31, 2018, we recorded an unrealized gain of $0.5 million due to the increase in fair market value of the AgeX marketable equity securities from November 28, 2018 to December 31, 2018.

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

Other income and expenses, net – Other income and expenses, net, in 2018 and 2017 consist primarily of net foreign currency transaction gains and losses recognized by Cell Cure and ESI, and changes in the fair value of the Cell Cure liability classified warrants. Foreign currency transaction gains and losses for the periods presented are principally related to the remeasurement of the US dollar denominated notes payable by Cell Cure to BioTime.

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 values of the Asterias and OncoCyte shares we hold create a deferred tax liability to us based on the closing market prices 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, and the related impact to the valuation allowance and deferred tax assets, are recorded in the period in which they occur. The income tax consequences of the AgeX Deconsolidation are discussed below.

On March 23, 2018, Ascendance was acquired by a third party in a merger though which AgeX received approximately $3.2 million in cash for its shares of Ascendance common stock. For financial reporting purposes, AgeX recognized a $3.2 million gain as a sale of its equity method investment in Ascendance. The sale was a taxable transaction to AgeX generating a taxable gain of approximately $2.2 million. We have sufficient net operating losses to offset the entire gain resulting in no income taxes due.

The Juvenescence Transaction was a taxable event for us that resulted in a gross taxable gain of approximately $29.4 million, which we expect to be fully offset with available net operating losses (“NOL”) carryforwards, resulting in no net income taxes due. Although the AgeX Deconsolidation on August 30, 2018 was not a taxable transaction to us and did not result in a current tax payment obligation, the financial reporting gain on the AgeX Deconsolidation generated a deferred tax liability, primarily representing the difference between book and tax basis of AgeX common stock on the AgeX Deconsolidation date. We expect this deferred tax liability to be fully offset by a corresponding release of our valuation allowance on deferred tax assets, resulting in no income tax provision or benefit from the AgeX Deconsolidation. The deferred tax liabilities on our investments in OncoCyte and Asterias, combined with the deferred tax liability generated by the fair value of our retained marketable securities in AgeX, are considered to be sources of taxable income that will more likely than not result in the realization of its deferred tax assets to the extent of those deferred tax liabilities, thereby reducing the need for a valuation allowance.

The distribution of AgeX shares of common stock to BioTime shareholders on November 28, 2018 was a taxable event for us that resulted in a gross taxable gain of approximately $26.4 million, which we expect to be fully offset with available net operating losses, resulting in no income taxes due.

A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. For federal and state income tax purposes, as a result of the deconsolidation of AgeX, Asterias and OncoCyte and the deferred tax liabilities generated from the fair values of AgeX, Asterias and OncoCyte shares from the respective deconsolidation dates, including the changes to those deferred tax liabilities due to changes in the AgeX, Asterias and OncoCyte stock prices, our deferred tax assets exceeded our deferred tax liabilities as of December 31, 2018 and 2017. As a result, we established a full valuation allowance as of December 31, 2018 and 2017 due to the uncertainty of realizing future tax benefits from our net operating loss carryforwards and other deferred tax assets.

For the year ended December 31, 2018, because we experienced a loss from continuing operations but generated other comprehensive income attributable to foreign currency translation adjustments, we allocated income tax expense against the component of foreign currency translation adjustment in 2018 using a 21% tax rate. Income tax benefit related to continuing operations for the year ended December 31, 2018 includes a tax benefit of $0.3 million due to the required intraperiod tax allocation. Conversely, other comprehensive income attributable to foreign currency translation adjustments for the year ended December 31, 2018 is net of an income tax expense of $0.3 million. No income tax provision or benefit was recorded for the year ended December 31, 2017 due to a full valuation allowance on the deferred tax assets.

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 OncoCyte shares, including any changes in the fair value of our AgeX shares, 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.

See Note 19 to our consolidated financial statements included elsewhere in this Report for the Asterias Merger that was completed on March 8, 2019. We are still evaluating whether the Asterias Merger is deemed to be a change of control, as defined by Internal Revenue Code Section 382, in which, if there is a change of control as of the merger date, utilization of the NOL and tax credit carryforwards may be subject to an annual limitation regarding their utilization against Asterias’ taxable income in future periods.

Liquidity and Capital Resources

At December 31, 2018, we had $23.6 million of cash and cash equivalents on hand. We also hold OncoCyte shares valued at $20.3 million as of December 31, 2018, that we may use for liquidity, as necessary and as market conditions allow. The market values shown may not represent the amount that could be realized in a sale of 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.

Since inception, we have incurred significant net losses and have funded our operations primarily through the issuance of equity securities, sale of common stock of a former subsidiary, receipt of research grants, royalties from product sales, license revenues and sales of research products. At December 31, 2018, we had an accumulated deficit of approximately $261.9 million, working capital of $29.5 million and shareholders’ equity of $92.2 million. We evaluated our projected cash flows and believe that our $30.7 million of cash, cash equivalents and marketable equity securities at December 31, 2018, plus our $20.3 million investment in OncoCyte and the $2.1 million receivable from OncoCyte we collected on February 15, 2019, provide sufficient cash, cash equivalents, and liquidity to carry out our current operations through at least twelve months from the issuance date of our consolidated financial statements included elsewhere in this Report.

On November 7, 2018, we entered into a definitive agreement to acquire via merger the remaining 61% ownership interest in Asterias Biotherapeutics, Inc. that we did not own. The merger was completed effective March 8, 2019 and as of that date, Asterias became our wholly-owned subsidiary and we will consolidate Asterias’ operations and results with our operations and results beginning on that date. As we integrate Asterias’ operations into our own, we expect to make extensive reductions in headcount and to reduce non-clinical related spend, in each case, as compared to Asterias’ operations before the acquisition. See Note 19 to our 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. In addition, we expect to incur significant costs in connection with the acquisition of Asterias and with integrating its operations. We may incur additional costs to maintain employee morale and to retain key employees. We will also incur significant fees and expenses relating to legal, accounting and other transaction fees and other costs associated with the merger. 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 used in operating activities

During 2018, our total research and development expenses, including $0.8 million in nonrecurring acquired in-process research and development expenses, were $21.8 million and our general and administrative expenditures were $24.7 million. Net loss attributable to BioTime for 2018 amounted to $46.0 million. Net cash used in operating activities during 2018 was $30.9 million. The difference between the net loss and net cash used in operating activities was primarily attributable to the following noncash items: $78.5 million gain on sale of AgeX shares and the AgeX Deconsolidation; $47.9 million unrealized loss on our equity method investment in OncoCyte at fair value; $35.4 million unrealized loss on our equity method investment in Asterias at fair value; $4.2 million unrealized loss on our equity method investment in AgeX at fair value; stock-based compensation expense of $5.4 million; depreciation and amortization expense of $3.3 million; a $1.8 million foreign currency remeasurement and other loss; and a $3.2 million gain on the disposition of AgeX’s Ascendance common stock. Changes in working capital also provided $0.6 million from operating activities.

Cash used in investing activities

During 2018, we generated $11.8 million in net cash provided by investing activities due primarily to $21.6 million in proceeds from the sale of our AgeX shares to Juvenescence and $3.2 million in proceeds from the sale of equity method investment in Ascendance prior to the AgeX Deconsolidation. These amounts were partially offset by a $9.7 million deconsolidation of AgeX’s cash and cash equivalents as part of the AgeX Deconsolidation, $1.9 million used to purchase certain intellectual property and in-process research and development by AgeX before the AgeX Deconsolidation and $1.4 million to purchase property and equipment, including payments on construction in progress at our Cell Cure facility lease.

Cash provided by financing activities

During 2018, we generated $5.8 million in net cash from financing activities, which was due primarily to $5.0 million in proceeds from our sale of AgeX shares to Juvenescence and $1.0 million in proceeds to AgeX from the sale of AgeX warrants to investors, both occurring prior to the AgeX Deconsolidation.

Off-Balance Sheet Arrangements

As of December 31, 2018, we did not have any off-balance sheet arrangements, as defined in Item 303(a) (4) (ii) of SEC Regulation S-K.

Under SEC rules and regulations, as a smaller reporting company, we are not required to provide the information required by this item.

Index to consolidated financial statements

See accompanying notes to consolidated financial statements.

Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors

BioTime, Inc.

Alameda, California

Opinion on the Consolidated Financial Statements

We have audited the consolidated balance sheets of BioTime, Inc. and Subsidiaries (collectively, the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive loss, changes in shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 14, 2019 expressed an unqualified opinion thereon.

Change in Accounting Principle

As discussed in Note 2 to the accompanying financial statements, the Company has changed their method of accounting for revenue in 2018 due to the adoption of Financial Accounting Standards Board (United States) Accounting Standard Codification Topic No. 606, Revenue from Contracts with Customers.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ OUM & CO. LLP

San Francisco, California

March 14, 2019

We have served as the Company’s auditor since 2014.

Report of Independent Registered Public Accounting Firm

Shareholders and Board of Directors

BioTime, Inc.

Alameda, California

Opinion on Internal Control over Financial Reporting

We have audited BioTime, Inc. and Subsidiaries’ (the “Company’s”) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive loss, changes in shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2018, and the related notes and our report dated March 14, 2019 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ OUM & CO. LLP

San Francisco, California

March 14, 2019

BIOTIME, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS)

See accompanying notes to the consolidated financial statements.

BIOTIME, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)