accordance with ASC 815-40, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s
Own Stock, contracts that require or may require the issuer to settle the contract for cash are liabilities recorded at fair
value, irrespective of the likelihood of the transaction occurring that triggers the net cash settlement feature. Changes to the
fair value of those liabilities are recorded in the statements of operations. Accordingly, since Asterias may be required to net
cash settle the Asterias Offering Warrants in the event of a Fundamental Transaction; the Asterias Offering Warrants are classified
as noncurrent liabilities at fair value, with changes in fair value recorded in other income or expense, net, in the statements
fair value of the Asterias Offering Warrants at the time of issuance was determined by using a combination of the Binomial Lattice
and Black-Scholes-Merton option pricing models under various probability-weighted outcomes which take into consideration the probability
of the fundamental transaction and net cash settlement occurring, using the contractual term of the warrants. In applying these
models, the fair value is determined by applying Level 3 inputs, as defined by ASC 820; these inputs have included assumptions
around the estimated future stock price of Asterias Common Stock, volatility and the timing of, and varying probabilities that
certain events will occur. The Asterias Offering Warrants are revalued each reporting period using the same methodology described
above. Changes in any of the key assumptions used to value the Asterias Offering Warrants could materially impact the fair value
of the warrants and Asterias’ financial statements.
May 13, 2016, the fair value of the Asterias Offering Warrants was approximately $6.0 million. Because the Asterias Offering Warrants
are accounted for as liabilities, the total proceeds from the Asterias Offering were allocated first entirely to the Asterias
Offering Warrants’ fair value and the remaining residual proceeds to the Asterias Common Stock. In addition, of the total
$1.8 million of the Asterias Offering discounts and expenses incurred, $0.6 million were allocated to the Asterias Offering Warrants,
based on the full fair value of the Asterias Offering Warrants and total gross proceeds, and immediately expensed as general and
administrative expenses. Total net proceeds allocated to the Asterias Offering Warrants were $5.5 million.
December 2, 2016, certain investors exercised 146,400 Asterias Offering Warrants for cash proceeds to Asterias of approximately
$640,000 (see Note 2).
December 31, 2017 and 2016, based on valuations performed by Asterias using the methodology described above, the fair value of
the Asterias Offering Warrants liability was $2.8 million and $8.7 million, respectively, resulting in Asterias recording an unrealized
gain of $5.9 million for the year ended December 31, 2017 and an unrealized loss of $3.1 million for the year ended December 31,
2016, which are included in other income and expenses, net, in the statements of operations.
classified as equity
March 30, 2016, Asterias’ board of directors declared a distribution of Asterias Common Stock purchase warrants to all Asterias
shareholders other than BioTime, in the ratio of one warrant for every five shares of Asterias Common Stock owned of record as
of the close of business on April 11, 2016. On April 25, 2016, Asterias distributed 3,331,229 warrants (the “Distribution
Warrants”). The distribution of the Distribution Warrants was treated as a disproportionate distribution since, in accordance
with the terms of the Share Transfer with BioTime, no warrants were distributed to BioTime (see Note 15). The Distribution Warrants
are classified as equity, have an exercise price of $5.00 per share, and were set to expire on September 30, 2016. Asterias recorded
the Distribution Warrants at a fair value of approximately $3.1 million with a noncash charge to shareholder expense included
in general and administrative expenses and a corresponding increase to equity as of March 30, 2016 as the Distribution Warrants
were deemed to be issued for accounting purposes on that date.
September 19, 2016 and February 3, 2017, Asterias extended the expiration date of the Distribution Warrants to February 15, 2017
and September 29, 2017, respectively, no other terms were changed. As a result of the extension of the expiration date of these
warrants, Asterias recorded a $2.0 million and $1.7 million noncash charges to shareholder expense included in general and administrative
expenses and a corresponding increase to equity for the years ended December 31, 2016 and 2017. These warrants expired unexercised
on September 29, 2017.