Business context and reporting period
The supplied filing is BioTime, Inc.’s Form 10-Q for the quarter and six months ended June 30, 2016, filed August 9, 2016. The request identifies Lineage Cell Therapeutics, Inc.; that name does not appear as the registrant in the supplied filing, which reports BioTime’s results.
BioTime described itself as a clinical-stage biotechnology company developing cell therapies and related technologies. Programs included Renevia and OpRegen; the company also consolidated subsidiaries including OncoCyte and Cell Cure Neurosciences. The filing reports unaudited U.S. GAAP results. Amounts below are in millions unless stated otherwise.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $1.266 | $2.009 | $3.340 | $3.268 |
| Gross profit (gross margin) | $1.171 (92.5%) | $1.749 (87.1%) | $3.020 (90.4%) | $2.743 (83.9%) |
| Operating loss | $(14.403) | $(13.496) | $(38.160) | $(27.005) |
| Net income (loss) | $21.225 | $(11.996) | $(2.653) | $(24.601) |
| Net income (loss) attributable to BioTime | $24.549 | $(9.691) | $7.438 | $(19.865) |
| Net cash used in operating activities | Not separately presented | Not separately presented | $(24.559) | $(19.036) |
The reported Q2 and six-month earnings include substantial noncash Asterias accounting gains and losses; they do not represent operating profitability. Cash and cash equivalents were $27.702 million at June 30, 2016, down from $42.229 million at December 31, 2015. Including available-for-sale securities, cash and securities totaled $28.321 million. Working capital was $23.6 million; total liabilities were $10.275 million and shareholders’ equity was $94.052 million. Recorded obligations included $701,000 of related-party convertible debt, $268,000 of promissory notes, and lease liabilities.
Material changes versus the prior comparable period
- On May 13, 2016, BioTime lost control of Asterias after its ownership fell from 57.1% to approximately 48.8% following an Asterias public offering in which BioTime did not participate. BioTime then deconsolidated Asterias and elected fair-value accounting for its retained investment.
- The deconsolidation produced a $49.048 million gain; the Asterias investment’s fair value then declined from $65.7 million on May 13 to $52.2 million on June 30, generating a $13.483 million unrealized loss. The retained holding was 21.7 million Asterias shares, approximately 49%.
- Comparability is materially affected: 2016 consolidated results include Asterias only through May 12, whereas 2015 includes Asterias for the full comparable periods. In the filing’s illustrative results excluding Asterias, six-month revenue was $0.986 million versus $1.716 million, and operating loss was $24.230 million versus $17.663 million.
- Reported six-month operating expenses rose: research and development increased 23.3% to $22.671 million and general and administrative expense increased 62.9% to $18.509 million. The filing cites clinical and regulatory work, compensation and stock-based compensation, professional fees, and subsidiary spending among the drivers.
- BioTime raised $16.4 million net from its June public offering of 7.322 million shares. A further 1.098 million shares issued on July 5 under the over-allotment option generated $2.5 million net. Shares outstanding were 101.668 million at June 30 and 103.392 million on August 5.
Outlook, management commentary, risks and unusual items
Management said cash, cash equivalents and available-for-sale securities at June 30 were expected to fund BioTime and subsidiaries for the next 12 months. This assessment was subject to risks and assumptions; the company had a $221.7 million accumulated deficit and reported significant operating losses since inception. Management noted that Cell Cure Neurosciences’ trials relied partly on grant funding and could be delayed, reduced or stopped if funding or BioTime support were insufficient. OncoCyte needed additional capital during 2016 to establish a CLIA-certified diagnostic laboratory.
The company’s programs remained development-stage, with clinical, regulatory, financing and commercialization uncertainty. BioTime also cautioned that market value of its Asterias and OncoCyte holdings—each estimated at $52.2 million at June 30—might not be realizable at those amounts because of trading depth, sale restrictions and market conditions. It had no present plan to liquidate those holdings. Outstanding warrants to purchase 9.395 million BioTime shares at $4.55 could yield $42.7 million if exercised, but exercise was not assured.
Other notable items: operating cash use was $24.559 million for the half-year; the company spent $1.7 million on property and equipment, including facility improvements. A seven-year Alameda lease commenced in February 2016, with base rent of $64,670 per month and annual increases of approximately 3%. Management reported effective disclosure controls and no material changes in internal control over financial reporting. The filing reported no pending litigation and no off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the issuer identity: the supplied 10-Q is for BioTime, Inc., not Lineage Cell Therapeutics, Inc.
- Review the Asterias deconsolidation and fair-value accounting, including the $49.0 million gain and $13.5 million subsequent unrealized loss, when interpreting reported earnings and balance-sheet comparisons.
- Assess cash runway against recurring operating cash use, planned clinical spending, grant dependence and OncoCyte’s stated financing needs.
- Check dilution and capital structure, including the June/July offerings, August 5 share count and outstanding warrants.
- Evaluate whether subsidiary market-value estimates can be realized, and whether clinical, regulatory, grant-funding or additional-capital risks have changed since the filing.