Financial
In June 2007, we completed a merger with BTHC VI, Inc. and its wholly-owned subsidiary that was formed for the purpose of completing the merger. BTHC VI was a public shell corporation with substantially no assets, liabilities or operations. We continued as the surviving entity in the merger and our business became the sole operations of BTHC VI after the merger. BTHC VI's acquisition of us effected a change in control and was accounted for as a reverse acquisition whereby we were the accounting acquirer for financial statement purposes. Accordingly, our financial statements present our historical results and do not include the historical financial results of BTHC VI prior to the merger. At the time the merger was effective, each share of common stock of Athersys was exchanged into 0.0358493 shares of BTHC VI common stock, par value $0.001 per share. Prior to the merger, BTHC VI effected a 1-for-1.67 reverse stock split of its shares of common stock and increased the number of authorized shares of common stock to 100,000,000. Athersys' authorized and issued shares of common and preferred stock have been retroactively restated for all periods presented to reflect the merger exchange ratio of 0.0358493. Basic and diluted net loss per share attributable to common stockholders have been computed using the retroactively restated common stock.
In connection with the merger in June 2007, Athersys negotiated with holders of its convertible preferred stock a planned restructuring of its capital stock, which included the conversion of the preferred stock into shares of its common stock, the termination of warrants issued to the former holders of Class C Convertible Preferred Stock, and the elimination of accrued dividends payable to the former holders of Class C Convertible Preferred Stock. As a result, immediately prior to the consummation of the merger with BTHC VI, all convertible preferred stock (including termination of warrants and elimination of accrued dividends) was converted into 53,341,747 shares of common stock. The change to the conversion ratios of the convertible preferred stock was deemed to be an induced conversion, which resulted in a $4.8 million deemed dividend and an increase to the net loss attributable to common stockholders in June 2007. Upon the closing of the merger, the 53,341,747 shares of common stock were exchanged for 1,912,356 shares of BTHC VI common stock using the merger exchange ratio. Athersys also retired all shares of stock held in treasury. Immediately after the merger, we completed an offering of 13,000,000 shares of common stock for aggregate gross proceeds of $65.0 million in June 2007, which included the issuance of warrants to purchase 3,250,000 shares of common stock to the investors. We also issued warrants to purchase 500,000 shares of common stock to the lead investor and warrants to purchase 1,093,525 shares of common stock to the placement agents. The placement agents also received cash fees in an amount equal to approximately $5.5 million, which was based on 8.5% of the gross proceeds, excluding proceeds from existing investors. In consideration for certain advisory services, we paid an affiliate of BTHC VI's then-largest stockholder a one-time fee of $350,000 in cash upon consummation of the merger. Upon the closing of the June offering, the $10.0 million aggregate principal amount of convertible notes issued to Angiotech were converted along with accrued interest into 1,885,890 shares of common stock at a conversion price of $5.50 per share, which was 110% of the price per share in the June offering, in accordance with the terms of the notes.
Upon the closing of the June offering, the notes issued to bridge investors were converted along with accrued interest into 531,781 shares of common stock at a conversion price of $5.00 per share, which was the price per share in the June offering. The bridge investors also exercised their $0.01 warrants upon the conversion of the convertible preferred stock in connection with the merger for 999,977 shares of common stock at an aggregate exercise price of $10,000. Upon the conversion of the bridge notes, the bridge investors also received five-year warrants to purchase 132,945 shares of common stock at $6.00 per share, which terms were consistent with the warrants issued to new investors in the June offering.
In May 2007, Athersys terminated the majority of stock option awards to its officers, employees, directors and consultants. Only a nominal number of option awards (5,052 option shares) held by former employees and consultants were assumed by us. Upon closing the merger, options for 3,625,000 shares of common stock were issued under our equity incentive plans to employees, directors and consultants with an exercise price of $5.00 per share, resulting in stock compensation expense of $5.1 million in 2007.
Also in May 2007, Athersys sold certain non-core technology related to its asthma discovery program to Wyeth Pharmaceuticals for $2.0 million.

We have incurred losses since inception of operations in December 1995 and had an accumulated deficit of $178 million at December 31, 2008. Our losses have resulted principally from costs incurred in research and development, clinical and preclinical product development, acquisition and licensing costs, and general and administrative costs associated with our operations. We have used the financing proceeds from private equity and debt offerings and other sources of capital to develop our technologies, to discover and develop therapeutic product candidates and to acquire certain technologies and assets. We have also built drug development capabilities that have enabled us to advance product candidates into clinical trials. We have established strategic collaborations that have provided revenues and capabilities to help further advance our product candidates, and we have also built a substantial portfolio of intellectual property.
Results of Operations
Since our inception, our revenues have consisted of license fees and milestone payments from our collaborators and grant proceeds primarily from federal and state grants. We have derived no revenue on the sale of FDA-approved products to date. Research and development expenses consist primarily of costs associated with external clinical and preclinical study fees, manufacturing costs, salaries and related personnel costs, legal expenses resulting from intellectual property application processes, and laboratory supply and reagent costs. We expense research and development costs as they are incurred. We expect to continue to make significant investments in research and development to enhance our technologies, advance clinical trials of our product candidates, expand our regulatory affairs and product development capabilities, conduct preclinical studies of our products and manufacture our products. General and administrative expenses consist primarily of salaries and related personnel costs, professional fees and other corporate expenses. To date, we have financed our operations through private equity and debt financing and investments by strategic collaborators. We expect to continue to incur substantial losses through at least the next several years.
The following table sets forth our revenues and expenses for the periods indicated. The following tables are stated in thousands.

                                         Year ended December 31,
                     Revenues          2008        2007        2006
                     License fees    $  1,880     $ 1,433     $ 1,908
                     Grant revenue      1,225       1,827       1,817

                                     $  3,105     $ 3,260     $ 3,725




      Research and development expenses                 Year ended December 31,
      Type of expense                                2008         2007        2006
      Personnel costs                              $  2,924     $  2,813     $ 2,721
      Research supplies                                 849          679       1,208
      Facilities                                        817          762         879
      Clinical and preclinical development costs      7,878        5,723       2,702
      Sponsored research                                393          465         579
      Patent legal fees                               1,481        1,086         595
      Other                                           1,431        1,821         781
      Stock-based compensation                          727        2,468         276

                                                   $ 16,500     $ 15,817     $ 9,741

          General and administrative expenses       Year ended December 31,
          Type of expense                         2008        2007        2006
          Personnel costs                       $  1,726     $ 1,987     $ 1,891
          Facilities                                 342         330         291
          Legal and professional fees              1,032       1,165         590
          Other                                    1,250       1,822         392
          Stock-based compensation                 1,129       2,671         183

                                                $  5,479     $ 7,975     $ 3,347

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007 Revenues. Revenues decreased to $3.1 million for the year ended December 31, 2008 from $3.3 million for 2007. Grant revenue decreased $0.6 million primarily due to the completion of a 2006 state grant in October 2008 as well as the timing of expenditures that are reimbursed with grant proceeds. License fee revenues increased $0.4 million as a result of the nature and timing of target acceptances under our collaboration agreement with Bristol-Myers Squibb and the achievement of a clinical development milestone in September 2008. During 2009, our revenues may fluctuate compared to 2008 based on the timing of Bristol-Myers Squibb's demand for targets and the timing of our work and based on the achievement and timing of Bristol-Myers Squibb milestones, if any. Beyond 2009, we anticipate that Bristol-Myers Squibb's demand for new targets will be reduced. Additionally, our grant revenues could fluctuate during any year based on the timing of grant-related activities and the award of new grants. Research and Development Expenses. Research and development expenses increased to $16.5 million in 2008 from $15.8 million in 2007. The increase of approximately $0.7 million related primarily to an increase in clinical and preclinical development costs of $2.2 million, an increase in patent legal fees of $395,000, an increase in research supplies expenses of $170,000 and an increase in personnel costs of $111,000 in 2008 compared to 2007. These increases were partially offset by a decrease in stock compensation expense of $1.7 million, a decrease in other expenses of $390,000 and a decrease in sponsored research of $72,000 in 2008 compared to 2007. The $2.2 million increase in preclinical and clinical costs is a result of the completion of the ATHX-105 phase I clinical trial, preparations for the ATHX-105 phase II clinical trial, completion of two additional phase I trials in the United Kingdom, performance of ATHX-105 non-clinical studies, and increases in MultiStem preclinical and clinical costs and manufacturing expenses. Our clinical costs in 2008 and 2007 are reflected net of Angiotech's cost-sharing amount related to our MultiStem acute myocardial infarction collaboration in the amount of $943,000 and $63,000, respectively. The increase in patent legal fees for 2008 was a result of maintaining our growing and maturing portfolio of patent applications, including prosecution costs for several cases that entered the national phase in 2008. Personnel costs increased due to the addition of personnel in support of our clinical programs, annual salary increases and increased benefit costs, which was partially offset by the absence of bonus payments in 2008. The decrease in other expenses was primarily a result of a milestone payment in 2007 in the amount of $1.0 million associated with a stem cell collaboration milestone and a stem cell IND milestone and was paid to the former owners of the technology. This decrease was partially offset by an increase in outsourced research and development expenses. We expect our research and development expenses to decrease in 2009, primarily as a result of the decision to suspend further development of ATHX-105, partially offset by expected increases in clinical development costs associated with our MultiStem programs. Other than external expenses for our clinical and preclinical programs, we do not track our research expenses by project; rather, we track such expenses by the type of cost incurred.

General and Administrative Expenses. General and administrative expenses decreased to $5.5 million in 2008 from $8.0 million in 2007. The $2.5 million decrease was due primarily to a decrease in stock compensation expense of $1.5 million, decrease in other expenses of $572,000, decrease in personnel costs of $261,000 , and a decrease in legal and professional fees of $133,000. The decrease in other expenses for 2008 was primarily as result of a one-time advisory fee of $350,000 in 2007 related to the merger. Personnel costs decreased due to the absence of bonus payments in 2008, which was partially offset by the addition of administrative support personnel, annual salary increases and increased benefit costs. The decrease in legal and professional fees in 2008 was primarily a result of reduced legal fees incurred in connection with SEC filings and transactional work. We expect our general and administrative expenses to continue at similar levels in 2009.
Depreciation. Depreciation expense decreased to $218,000 in 2008 from $283,000 in 2007. The decrease in depreciation expense was due to more laboratory equipment, computer equipment, furniture and leasehold improvements becoming fully depreciated.
Other Income. In May 2007, Athersys sold certain non-core technology related to its asthma discovery program to Wyeth Pharmaceuticals for $2.0 million. Interest Income. Interest income decreased to $1.1 million in 2008 from $1.6 million in 2007. The change in interest income was due to the receipt and investment of the proceeds from the equity offering in June 2007, the proceeds of which have been declining as they are used to fund operations. Due to declining interest rates and lower cash balances as a result of our ongoing and planned clinical and preclinical development, we expect our 2009 interest income to be less than 2008.
Interest Expense. Interest expense on Athersys' debt outstanding under its senior loan and its subordinated convertible promissory notes decreased to $94,000 in 2008 from $1.3 million in 2007. The decrease in interest expense was due to the repayment of the senior loan in June 2008, conversion in June 2007 of $2.5 million in aggregate principal amount of subordinated convertible promissory notes issued to bridge investors, and conversion in June 2007 of $10 million in aggregate principal amount of subordinated convertible promissory notes issued to Angiotech. We do not expect any significant interest expense in 2009 unless we incur new debt.
Accretion of Premium on Convertible Debt. The accretion of premium on convertible debt of $0.5 million in 2007 relates to the $2.5 million in aggregate principal amount of subordinated secured convertible promissory notes issued to bridge investors in 2006 that were converted into common stock upon the closing of the equity offering in June 2007. The notes, if not converted, were repayable with accrued interest at maturity, plus a repayment fee of 200% of the outstanding principal. Athersys computed a premium on the debt in the amount of $5.25 million due upon redemption, which was being accreted over the term of the notes using the effective interest method. The unamortized premium was reversed and recorded in additional paid-in-capital when the notes were converted in June 2007.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006 Revenues. Revenues decreased to $3.3 million for the year ended December 31, 2007 from $3.7 million for 2006. License fee revenues decreased $0.5 million as a result of the nature and timing of target acceptances under our collaboration agreement with Bristol-Myers Squibb and Pfizer. Grant revenue remained consistent at $1.8 million for each of 2007 and 2006.
Research and Development Expenses. Research and development expenses increased to $15.8 million in 2007 from $9.7 million in 2006. The increase of approximately $6.1 million related primarily to an increase in clinical and preclinical development costs of $3.0 million, an increase in stock compensation expense of $2.2 million, an increase in other expenses of $1.0 million and an increase in patent legal fees of $0.5 million in 2007 compared to 2006. These increases were partially offset by a decrease in research supplies expenses of $529,000, a decrease in sponsored research of $114,000 and a decrease in facilities costs of $117,000 in 2007 compared to 2006. The $3.0 million increase in preclinical and clinical costs is a result of the initiation of the ATHX-105 phase I clinical trial, performance of ATHX-105 non-clinical studies, and increases in MultiStem preclinical and clinical costs and manufacturing expenses. Included in other expenses for 2007 were two milestone payments totaling $1.0 million in cash and stock associated with a collaboration milestone and an IND milestone related to our stem cell technology paid to the former owners of the technology. In 2006, other expenses included a milestone payment of $125,000 paid in stock related to a patent milestone covering the stem cell technology. These were the final milestone payments to be made by us under the agreement governing the acquisition of the stem cell technology. The increase in patent legal fees for 2007 was a result of maintaining our growing and maturing portfolio of patent applications and the performance of patent legal work related to the May 2007 asthma asset sale. Included in personnel costs for 2007 and 2006 was approximately $447,000 and $121,000, respectively, of bonus payments related to the achievement of certain milestones. We do not track our research expenses by project; rather, we track such expenses by the type of cost incurred.

General and Administrative Expenses. General and administrative expenses increased to $8.0 million in 2007 from $3.3 million in 2006. The increase was due primarily to an increase in stock compensation expense of $2.5 million, an increase in other expenses of $1.4 million, an increase in legal and professional fees of $575,000 and an increase in personnel and facilities costs of $135,000. Included in other expenses for 2007 was a one-time advisory fee of $350,000 related to the merger, an allowance against a loan receivable in the amount of $193,000, and $1.3 million of other general and administrative costs such as printing costs for SEC filings, Nasdaq listing fees, directors' and officers' insurance costs, investor and public relations costs, recruiting costs and costs related to compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Included in personnel costs for 2007 and 2006 was approximately $475,000 and $89,000, respectively, of bonus payments related to the achievement of certain milestones. Also included in personnel costs in May 2006 was approximately $122,000 ($146,000 including tax) in connection with the forgiveness of a 2002 loan made to our Chief Executive Officer. The increase in legal and professional fees in 2007 was primarily a result of legal fees incurred in connection with SEC filings, accounting and auditing fees incurred in connection with SEC filings and fees for our board of directors. Depreciation. Depreciation expense decreased to $283,000 in 2007 from $528,000 in 2006. The decrease in depreciation expense was due to more laboratory equipment, computer equipment, furniture and leasehold improvements becoming fully depreciated.
Other Income and Equity in Earnings of Unconsolidated Affiliate. In May 2007, Athersys sold certain non-core technology related to its asthma discovery program to Wyeth Pharmaceuticals for $2.0 million. In January 2006, a milestone was achieved related to Athersys' joint venture with Oculus. As a result, Athersys received $100,000 of stock-based proceeds from Oculus, which was recorded in other income. Similarly, Oculus also received stock-based proceeds in another company in the amount of $260,000. Athersys recorded its share of Oculus' net income (after recapturing past net losses) of $117,000 in equity in earnings of unconsolidated affiliate in 2006.
Interest Income. Interest income increased to $1.6 million in 2007 from $119,000 in 2006. The change in interest income was due to the receipt and investment of the proceeds from the equity offering in June 2007.
Interest Expense. Interest expense on Athersys' debt outstanding under its senior loan and its subordinated convertible promissory notes increased to $1.3 million for 2007 from $1.0 million in 2006. The increase in interest expense was due to the $2.5 million in aggregate principal amount of subordinated convertible promissory notes issued by Athersys to its bridge investors in October 2006, and the $10 million in aggregate principal amount of subordinated convertible promissory notes issued to Angiotech in 2006 and 2007. These convertible promissory notes were converted in the equity offering in June 2007.
Accretion of Premium on Convertible Debt. The accretion of premium on convertible debt was $0.5 million in 2007 and $0.3 million in 2006. The accretion relates to the $2.5 million in aggregate principal amount of subordinated secured convertible promissory notes issued to bridge investors in October 2006 that were converted into common stock upon the closing of the equity offering in June 2007. The notes, if not converted, were repayable with accrued interest at maturity, plus a repayment fee of 200% of the outstanding principal. Athersys computed a premium on the debt in the amount of $5.25 million due upon redemption, which was being accreted over the term of the notes using the effective interest method. The unamortized premium was reversed and recorded in additional paid-in-capital when the notes were converted in June 2007.
Cumulative Effect of Change in Accounting Principle. Effective January 1, 2006, Athersys adopted the fair value recognition provisions of SFAS No. 123(R) using the modified-prospective-transition method. SFAS No. 123(R) requires Athersys to . . .