The Business

OVERVIEW

Caladrius Biosciences, Inc. (“we,” “us,” "our," “Caladrius” or the “Company”), is a company developing cellular therapeutics to treat certain diseases. We leverage our internal specialized cell therapy clinical development expertise to select and develop early-stage cell therapy candidates with the intention of partnering these candidates post proof-of-concept in humans. Our current lead product candidate, CLBS03, is an autologous ex vivo polyclonal T regulatory cell ("Treg") clinical phase 2 therapy targeting adolescents with recent-onset type 1 diabetes mellitus (“T1D”). Our subsidiary, PCT, LLC, a Caladrius Company^TM(“PCT”), is a leading provider of development and manufacturing services to the cell and cell-based gene therapy industry. PCT has significant cell therapy-specific experience and expertise, an expansive list of noteworthy clients and significant revenue growth over the past three years. Notably, PCT and Hitachi Chemical Co. America, Ltd. ("Hitachi America") and Hitachi Chemical Co., Ltd. ("Hitachi" and together with Hitachi America, “Hitachi Chemical”) are engaged in a strategic collaboration to accelerate the creation of a global commercial cell therapy development and manufacturing enterprise with deep engineering expertise.

CLBS03

We are developing strategically, through the utilization of or core development and manufacturing expertise, a product candidate that is an innovative therapy for TID. This therapy is based on a proprietary platform technology for immunomodulation. We have selected as an initial target the unmet medical need of patients who are newly diagnosed with T1D, most of whom will be below the age of 18. This program is based on the use of T regulatory cells ("Tregs") to treat diseases caused by imbalances in an individual's immune system. This novel approach seeks to restore immune balance by enhancing Treg number and function. Tregs are a natural part of the human immune system and regulate the activity of T effector cells; the cells that are responsible for protecting the body from pathogens and foreign antigens. When Tregs function properly, only harmful foreign materials are attacked by T effector cells. In autoimmune disease, however, it is thought that deficient Treg activity and numbers permit the T effector cells to attack the body's own beneficial cells. In the case of T1D, the beta cells in the pancreas are attacked thereby reducing and/or eliminating over time the patient's ability to produce insulin. Insulin is necessary to regulate sugar metabolism and maintain proper sugar levels in the blood. Inconsistent or unnatural insulin levels can lead to many complications, including blindness, vascular disease and, if no insulin supplement is provided, even death. There are currently no curative treatments, only lifelong insulin therapy, which therapy often does not prevent serious co-morbidities. Two Phase 1 clinical trials of this technology in T1D demonstrated safety and tolerance, feasibility of manufacturing, an implied durability of effect as well as an early indication of potential therapeutic effect through the preservation of beta cell function. In the first quarter of 2016, we commenced patient enrollment in the first of two cohorts in The Sanford Project: T-Rex Study, a Phase 2 prospective, randomized, placebo-controlled, double-blind clinical trial (the "TRex Study") to evaluate the safety and efficacy of CLBS03 in adolescents with recent onset T1D. In October 2016 we received a satisfactory safety evaluation by our independent Data Safety Monitoring Board based on the safety data then available from the first 19 patients enrolled in the trial. A subsequent interim analysis of early therapeutic effect is planned after approximately 50% of patients reach the six-month follow-up milestone, which analysis is expected in late 2017 or early 2018. We entered into a strategic collaboration with Sanford Research to support the execution of this trial. Sanford Research is a U.S.-based non-profit research organization that supports an emerging translational research center focused on finding a cure for T1D. On February 23, 2017, the California Institute for Regenerative Medicine ("CIRM") awarded us funds of up to $12.2 million to support the T-Rex Study. The total $12.2 million amount will become payable upon the achievement of certain milestones which are still under negotiation. We expect to receive $5.7 million in initial funding on April 1, 2017. CLBS03 has been granted Fast Track and orphan drug designations from the FDA as well as Advanced Therapeutic Medicinal Product ("ATMP") classification from the European Medicines Agency ("EMA")

Ischemic Repair (CD34 Cell Technology)

Our CD34 cell technology has led to the development of therapeutic candidates designed to address diseases and conditions caused by ischemia. Ischemia occurs when the supply of oxygenated blood to healthy tissue is restricted. Through the administration of CD34 cells, we seek to promote the development and formation of new blood vessels and thereby increase blood flow to the impacted area. We believe that conditions caused by underlying ischemic injury can improve through our CD34 cell technology, including critical limb ischemia ("CLI"). Published reports in Circulation Cardiovascular Interventions, Atherosclerosis, Stem Cells and Circulation Journal, provide preliminary evidence that CD34 cell therapy is safe and can exert significant therapeutic effects in patients with CLI, a condition in which blood flow to the legs is severely impaired, causing pain and non-healing ulcers and, ultimately, potentially resulting in the need for amputation. Our Clinical Trial Notification for a pivotal Phase 2 trial investigating CLBS12 (a candidate for CLI) was submitted to the Japanese Pharmaceutical and Medical Device Agency ("PMDA") and was cleared to proceed. The protocol design was agreed with PMDA and if successful, could provide the basis for conditional approval under Japan's favorable regenerative medicine law. We are seeking to collaborate on CLBS12 with development and/or manufacturing partners. We submitted multiple grant applications in an effort to seek non-dilutive financing to investigate the CD34 technology for additional clinical indications in the United States and expect to learn the results of those applications in the first half of 2017.

We intend to develop this platform if capital becomes available through grants, partnerships or licensing, as well as potentially using reasonable amounts of our own capital as it becomes available.

Additional Out-licensing Opportunities

Our broad intellectual property portfolio of cell therapy assets includes notable programs available for out-licensing in order to continue their clinical development. These include additional indications for our Treg product, a platform using tumor cell/dendritic cell technology for immuno-oncology and additional indications for our CD34 cell technology. The immuno-oncology program has the benefit of promising Phase 2 clinical data and applicability to multiple indications. This platform is based on our extensive intellectual property portfolio. In 2016 we completed multiple out-licensing agreements for these and other technology platforms in an effort to monetize non-core assets.

Our long term strategy focuses on advancing cell-based therapies to the market and assisting patients suffering from life-threatening medical conditions. We believe we are positioned to realize potentially meaningful value increases within our own proprietary pipeline based on demonstration of proof-of-concept in man as well as process and manufacturing advancements.

Cell Therapy Development and Manufacturing

PCT is a leading cell therapy development and manufacturing provider (often called a contract development and manufacturing organization, or "CDMO"), specializing in cell and cell-based gene therapies. PCT offers high-quality development and manufacturing capabilities (e.g., current Good Manufacturing Practice (“cGMP”) manufacturing systems and facilities), quality systems, cell and tissue processing, logistics, storage and distribution and engineering solutions (e.g., process and assay development, optimization and automation) to clients with therapeutic candidates at all stages of development. PCT produces clinical supplies and ultimately, intends also to produce commercial product for its clients. PCT has worked with over 100 clients and produced over 20,000 cell therapy products since it was founded 18 years ago. PCT’s manufacturing services are designed to reduce the capital investment and time required by clients to advance their development programs compared to conducting the process development and manufacturing in-house. PCT has demonstrated regulatory expertise, including the support of over 50 U.S. and European Union ("EU") regulatory filings for clients, and expertise across multiple cell types and therapeutic applications, including immunotherapy (e.g. CAR-T therapies), neuro/endocrine therapies, hematopoietic replacement and tissue repair/regeneration. PCT offers a complete development pathway for its clients, with services supporting preclinical through commercial phase, all underpinned by timely process optimization and automation support. PCT currently operate facilities qualified under cGMPs in each of Allendale, New Jersey and Mountain View, California, including EU-compliant production capacity in the Allendale facility. On March 11, 2016, PCT entered into a strategic collaboration and license agreement with Hitachi Chemical to accelerate the creation of a global commercial cell therapy development and manufacturing enterprise with deep engineering expertise, at which time Caladrius sold 19.9% of its ownership stake in PCT to Hitachi Chemical.

On March 16, 2017 (the "Effective Date"), Caladrius entered into an interest purchase agreement (the "Purchase Agreement"), by and among Caladrius, PCT and Hitachi America, pursuant to which Hitachi America has agreed to acquire the 80.1% membership interest in PCT that it does not already own from Caladrius for $75.0 million in cash (the “Sale”), subject to potential adjustment, including based on PCT’s cash and outstanding indebtedness as of the closing of the Sale, and a potential future milestone payment (the “Purchase Price”). Pursuant to the terms of the Purchase Agreement, at the Effective Date, Hitachi America will pay Caladrius $5.0 million of the Purchase Price (the “Initial Payment”). At the closing of the Sale (the “Closing”), an additional $5.0 million of the Purchase Price will be deposited into an escrow account to cover potential indemnification claims of Hitachi America, if any, under the Purchase Agreement. The Closing is subject to customary closing conditions, including approval of Caladrius’ stockholders, and is expected to occur during the second quarter of 2017. However, we cannot provide assurance as to when the Sale will be completed, or whether it will be completed at all.

As part of the Purchase Price, Hitachi will pay Caladrius $5.0 million (the “Milestone Payment”) if PCT achieves $125 million in Cumulative Revenue (excluding clinical service reimbursables) (the “Milestone”) for the period from January 1, 2017 through December 31, 2018. For purposes of the Milestone, “Cumulative Revenue” will be calculated based on PCT’s revenue from all customers (including Caladrius and its subsidiaries) in accordance with the financial accounting and reporting standards set forth in the statements and pronouncements of the Financial Accounting Standards Board (“FASB”), consistently applied (see Note 18).

Financial Information & Liquidity

Liquidity (assuming the Sale Closes in the Second Quarter of 2017) - see Note 18

The Sale may constitute the sale of substantially all of the Company's property and assets under Delaware law, and the Company is therefore seeking the approval of the Sale by the Company's stockholders which is expected in the second quarter of 2017. The Company expects to receive the Initial Payment in the first quarter of 2017. If the Sale closes, the Company expects to receive the remainder of the Purchase Price (other than the $5.0 million paid into escrow and the milestone payment) in the second quarter of 2017. We believe that the expected cash on hand from the Sale will enable us to fund the development of CLBS03 and other operating expenses for at least the next 12 months following the issuance of our financial statements, as well as to repay our outstanding loan with Oxford Finance in 2017.

We cannot provide assurance as to when the Sale will be completed, or whether it will be completed at all. In addition, if the Purchase Agreement is terminated under certain circumstances, Caladrius will be required to repay the $5.0 million Initial Payment and pay a termination fee of $5.0 million. If such payments are not made within 90 days, Hitachi America's membership interest in PCT will increase from 19.9% to 32.22%. If the Purchase Agreement is terminated under certain other circumstances, Caladrius will be required to return the $5.0 million Initial Payment, and, if does not do so within 90 days, Hitachi America's membership interest in PCT will increase from 19.9% to 26.02%. Each of these scenarios could have adverse effects on our business, results of operations and the trading price of our common stock.

Liquidity (assuming Sale Does Not Close)

During the year ended December 31, 2016, the Company incurred a net loss of $33.3 million and used $23.7 million of net cash in operating activities. As of December 31, 2016, the Company's accumulated deficit was $404.8 million. We anticipate requiring additional capital in order to grow our PCT business, to fund the development of CLBS03, to fund other operating expenses, and to make principal and interest payments on our loan with Oxford Finance. To meet our short and long term liquidity needs, we currently expect to use existing cash and cash equivalents balances, our revenue generating activities and a variety of other means, including our common stock purchase agreements with Aspire Capital (see Note 13). Other sources of liquidity could include additional potential issuances of debt or equity securities in public or private financings, option exercises, partnerships and/or collaborations and/or sale of assets. In addition, we will continue to seek as appropriate grants for scientific and clinical studies from various governmental agencies and foundations. While we continue to seek capital through a number of means, there can be no assurance that additional financing will be available to us on acceptable terms, if at all. If we are unable to access capital necessary to meet our liquidity needs, we may have to delay or discontinue the development of CLBS03, and/or the expansion of our business or raise funds on terms that we may consider unfavorable.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern for at least the next 12 months following the issuance of our financial statements; however, the above conditions raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverabilty and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.

Reverse Stock Split

On July 28, 2016, we implemented a one-for-ten reverse split of our issued and outstanding shares of our common stock (the “Reverse Stock Split”), as authorized at the annual meeting of stockholders on June 22, 2016. The Reverse Stock Split became effective on July 27, 2016 at 5:00 pm and our common stock began trading on The NASDAQ Capital Market on a post-split basis at the open of business on July 28, 2016. As of July 28, 2016, every ten shares of our issued and outstanding common stock were combined into one share of our common stock, except to the extent that the Reverse Stock Split resulted in any of our stockholders owning a fractional share, which was rounded up to the next highest whole share. In connection with the Reverse Stock Split, there was no change in the nominal par value per share of $0.001. The Reverse Stock Split was effectuated in order to increase the per share trading price of our common stock to satisfy the $1.00 minimum bid price requirement for continued listing on The NASDAQ Capital Market.

All share and per share amounts of common stock, options and warrants in the accompanying financial statements have been restated for all periods presented to give retroactive effect to the Reverse Stock Split. Accordingly, the consolidated statements of equity reflect the impact of the Reverse Stock Split by reclassifying from “common stock” to “Additional paid-in capital” in an amount equal to the par value of the decreased shares resulting from the Reverse Stock Split.

Basis of Presentation

The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP"). In the opinion of management, the accompanying Consolidated Financial Statements of the Company and its subsidiaries, include all normal and recurring adjustments considered necessary to present fairly the Company's financial position as of December 31, 2016 and 2015, and the results of its operations and its cash flows for the years ended December 31, 2016 and 2015.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting periods. The Company bases its estimates on historical experience and other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. The Company makes critical estimates and assumptions in determining the fair values of goodwill for potential goodwill impairments, useful lives of our long-lived tangible and intangible assets, allowances for doubtful accounts, and stock-based awards values. Accordingly, actual results could differ from those estimates and assumptions.

Principles of Consolidation

The Consolidated Financial Statements include the accounts of Caladrius Biosciences, Inc. and its wholly owned and partially owned subsidiaries and affiliates as listed below. All intercompany activities have been eliminated in consolidation.



Entity	Percentage of Ownership	Location
Caladrius Biosciences, Inc.	100%	United States of America
Amorcyte, LLC	100%	United States of America
PCT, LLC, a Caladrius Company (1)	80.1%	United States of America
NeoStem Family Storage, LLC (1)	80.1%	United States of America
PCT Allendale, LLC (1)	80.1%	United States of America
Athelos Corporation (2)	98.4%	United States of America
NeoStem Oncology, LLC	100%	United States of America

(1) As of December 31, 2016, Hitachi America's ownership interest was 19.9%

(2) As of December 31, 2016, Becton Dickinson's ownership interest in Athelos Corporation was 1.6%.