ATHERSYS, INC / NEW - Quarter Report: 2008 June (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Athersys, Inc.

Delaware		20-4864095
(State or other jurisdiction		(I.R.S. Employer Identification No.)
of incorporation or organization)
3201 Carnegie Avenue, Cleveland, Ohio		44115-2634
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (216) 431-9900

Former name, former address and former fiscal year, if changed since last report: Not Applicable

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 þ No o

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

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Small reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes o No þ

The number of outstanding shares of the registrant’s common stock, $0.001 par value, as of August 1, 2008 was 18,927,988.

 

 

ATHERSYS INC.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements			1
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			9
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk			18
ITEM 4. Controls and Procedures			18
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders			19
ITEM 6. Exhibits			19
SIGNATURES			20
EXHIBIT INDEX			21
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Athersys, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

		June 30,				December 31,
		2008				2007
		(Unaudited)				(Note)
Assets
Current assets:
Cash and cash equivalents		$	17,651			$	13,248
Available-for-sale securities			19,037				22,477
Accounts receivable			697				836
Receivable from Angiotech			269				63
Investment interest receivable			163				262
Deposit			163				163
Prepaid expenses and other			970				394
Total current assets			38,950				37,443
Available-for-sale securities			3,028				13,850
Deposits			109				100
Note receivable, net			48				86
Equipment, net			434				387
Accounts receivable, net			—				42
Equity investments			317				317
Total assets		$	42,886			$	52,225
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	2,125			$	1,011
Accrued compensation and related benefits			263				71
Accrued clinical trial costs			18				735
Accrued expenses and other			793				993
Current portion of long-term debt, net			—				1,784
Total current liabilities			3,199				4,594
Stockholders’ equity:
Preferred stock, at stated value; 10,000,000 shares authorized, and no shares issued and outstanding at June 30, 2008 and December 31, 2007			—				—
Common stock, $0.001 par value; 100,000,000 shares authorized, and 18,927,988 shares issued and outstanding at June 30, 2008 and December 31, 2007			19				19
Additional paid-in capital			208,942				208,039
Accumulated other comprehensive (loss) income			(9	)			52
Accumulated deficit			(169,265	)			(160,479	)
Total stockholders’ equity			39,687				47,631
Total liabilities and stockholders’ equity		$	42,886			$	52,225

Note: The balance sheet at December 31, 2007 has been derived from audited financial statements at that date. It does not include, however, all of the information and notes required by U.S. generally accepted accounting principles for complete financial statements.

See accompanying notes to unaudited condensed consolidated financial statements.

Athersys, Inc.

Condensed Consolidated Statements of Operations

(In thousands, except share and per share data)

(Unaudited)

		Three months ended								Six months ended
		June 30,								June 30,
		2008				2007				2008				2007
Revenues
License fees		$	453			$	313			$	843			$	623
Grant revenue			323				410				725				979
Total revenues			776				723				1,568				1,602
Costs and expenses
Research and development			3,737				4,989				8,052				7,354
General and administrative			1,381				3,497				2,862				4,105
Depreciation			52				75				109				155
Total costs and expenses			5,170				8,561				11,023				11,614
Loss from operations			(4,394	)			(7,838	)			(9,455	)			(10,012	)
Other income			17				1,500				20				1,500
Interest income			286				175				742				222
Interest expense			(31	)			(710	)			(93	)			(1,043	)
Accretion of premium on convertible debt			—				(196	)			—				(456	)
Net loss		$	(4,122	)		$	(7,069	)		$	(8,786	)		$	(9,789	)
Preferred stock dividends		$	—			$	(284	)		$	—			$	(659	)
Deemed dividend resulting from induced conversion of convertible preferred stock		$	—			$	(4,800	)		$	—			$	(4,800	)
Net loss attributable to common stockholders		$	(4,122	)		$	(12,153	)		$	(8,786	)		$	(15,248	)
Basic and diluted net loss per common share attributable to common stockholders		$	(0.22	)		$	(2.53	)		$	(0.46	)		$	(5.99	)
Weighted average shares outstanding, basic and diluted			18,927,988				4,800,760				18,927,988				2,547,265

See accompanying notes to unaudited condensed consolidated financial statements.

(In thousands)

(Unaudited)

		Six months ended
		June 30,
		2008				2007
Operating activities
Net loss		$	(8,786	)		$	(9,789	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			109				155
Gain on sale of fixed assets			(17	)			—
Accretion of premium on convertible debt			—				456
Stock-based compensation			903				4,133
Provision on note receivable			38				—
Expense related to warrants issued to lenders			16				438
Amortization of discount on available-for-sale securities and other			(75	)			7
Changes in operating assets and liabilities:
Accounts receivable			181				530
Receivable from Angiotech			(206	)			—
Prepaid expenses and other assets			(486	)			(72	)
Accounts payable and accrued expenses			389				(95	)
Net cash used in operating activities			(7,934	)			(4,237	)
Investing activities
Purchase of available-for-sale securities			(15,423	)			—
Maturities of available-for-sale securities			29,699				—
Proceeds from sale of fixed assets			17				—
Purchases of equipment			(156	)			(3	)
Net cash provided by (used in) investing activities			14,137				(3	)
Financing activities
Principal payments on debt			(1,800	)			(1,844	)
Proceeds from convertible promissory note			—				5,000
Proceeds from issuance of common stock, net			—				58,495
Net cash (used in) provided by financing activities			(1,800	)			61,651
Increase in cash and cash equivalents			4,403				57,411
Cash and cash equivalents at beginning of the period			13,248				1,528
Cash and cash equivalents at end of the period		$	17,651			$	58,939

Athersys, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

1. Background

We are a biopharmaceutical company engaged in the development and commercialization of therapeutic products in one business segment. Our operations consist primarily of research and product development activities.

On May 24, 2007, BTHC VI, Inc. (“BTHC VI”) and its wholly owned subsidiary, B-VI Acquisition Corp., entered into an Agreement and Plan of Merger with Athersys, Inc. (“Old Athersys”). Pursuant to the terms of the Agreement and Plan of Merger, B-VI Acquisition Corp., which BTHC VI recently had incorporated for the purpose of completing the merger transaction described herein, merged with and into Old Athersys on June 8, 2007, with Old Athersys continuing as the surviving entity in the merger (the “Merger”). BTHC VI was a shell corporation with substantially no assets, liabilities or operations as of the date of the Merger, and had 299,622 shares of common stock outstanding. As a result of the Merger, Old Athersys became our wholly-owned subsidiary, and the business of Old Athersys became our sole operations. On August 31, 2007, Old Athersys changed its name to ABT Holding Company and BTHC VI changed its name to Athersys, Inc. Unless otherwise indicated, all references in this quarterly report to “the Company” or “Athersys” are (a) prior to the Merger, to ABT Holding Company (i.e., Old Athersys) and its subsidiaries and (b) following the Merger, to Athersys, Inc. and its subsidiaries, including ABT Holding Company.

BTHC VI’s acquisition of Old Athersys on June 8, 2007 effected a change in control and was accounted for as a reverse acquisition whereby Old Athersys is the accounting acquirer for financial statement purposes. Accordingly, the financial statements of the Company presented reflect the historical results of Old Athersys and do not include the historical financial results of BTHC VI prior to the consummation of the Merger. The Company’s authorized and issued shares of common and preferred stock have been retroactively restated for all historical periods presented to reflect the Merger exchange rate of 0.0358493. Basic and diluted net loss per share attributable to common stockholders have been computed using the retroactively restated common stock.

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 with an exercise price of $6.00 and a five-year term. 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, each with an exercise price of $6.00 and a five-year term.

2. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2007. The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and Article 10 of Regulation S-X. Accordingly, since they are interim statements, the accompanying financial statements do not include all of the information and notes required by GAAP for complete financial statements. The accompanying financial statements reflect all adjustments, consisting of normal recurring adjustments, that are, in the opinion of management, necessary for a fair presentation of financial position and results of operations for the interim periods presented. Interim results are not necessarily indicative of results for a full year.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Our critical accounting policies, estimates and assumptions are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is included below in this Quarterly Report on Form 10-Q.

3. New Accounting Standards

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Accounting Standards (“SFAS”) No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements. The FASB delayed the effective date of SFAS No. 157 for non-financial assets and liabilities to fiscal years beginning after November 15, 2008. We adopted the provisions of SFAS No. 157 related to our financial assets and liabilities on January 1, 2008. See Note 6.

In May 2008, the FASB issued FASB Staff Position APB 14-1 (“FSP 14-1”), Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). FSP 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash on conversion to separately account for the liability and equity components in a manner that reflects the issuer’s nonconvertible debt borrowing rate. The effective date of FSP 14-1 is January 1, 2009 for calendar year companies with retrospective application required for all periods presented for instruments that were outstanding during any period presented in the annual financial statements. We are currently evaluating the effect that FSP 14-1 will have on our financial statements.

4. Net Loss per Share

Basic and diluted net loss per share attributable to common stockholders are presented in conformity with SFAS No. 128, Earnings per Share, for all periods presented. In accordance with SFAS No. 128, basic and diluted net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period.

We have outstanding options and warrants, and prior to June 8, 2007, also had outstanding convertible debt and convertible preferred stock, which have not been used in the calculation of diluted net loss per share because to do so would be anti-dilutive. The following instruments were excluded from the calculation of diluted net loss per share attributable to common stockholders because their effects would be antidilutive:

1)		Outstanding stock options to purchase 3,776,240 shares of common stock for both the three-month and six-month periods ended June 30, 2008 and 3,629,814 shares of common stock for both the three-month and six-month periods ended June 30, 2007;
2)		Warrants to purchase 5,125,496 shares of common stock for each of the three-month and six-month periods ended June 30, 2008 and each of the three-month and six-month periods ended June 30, 2007;
3)		Shares of common stock issuable upon the conversion of convertible preferred stock in the amount of 276,071 and 319,839 for the three-month and six-month periods ended June 30, 2007, respectively; and
4)		Shares of common stock issuable upon the conversion of convertible promissory notes in the approximate amount of 202,631 and 224,197 for the three-month and six-month periods ended June 30, 2007, respectively.

5. Comprehensive Loss

In accordance with SFAS No. 130, Reporting Comprehensive Loss, all components of comprehensive loss, including net loss, are reported in the financial statements in the period in which they are recognized. Comprehensive loss is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources.

Below is a reconciliation, in thousands, of net loss to comprehensive loss for all periods presented.

		Three months ended								Six months ended
		June 30,								June 30,
		2008				2007				2008				2007
Net loss		$	(4,122	)		$	(7,069	)		$	(8,786	)		$	(9,789	)
Unrealized loss on available-for-sale securities			(123	)			—				(61	)			—
Comprehensive loss		$	(4,245	)		$	(7,069	)		$	(8,847	)		$	(9,789	)

6. Fair Value of Financial Instruments

On January 1, 2008, we adopted SFAS No. 157 related to our financial assets and liabilities and the methods to measure fair value of assets and liabilities as set forth therein. Our available-for-sale securities include U.S. government obligations, corporate debt securities, floating rate notes and commercial paper.

SFAS No. 157 classifies the inputs used to measure fair value into the following hierarchy:

Level 1		Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2		Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
Level 3		Unobservable inputs for the asset or liability.

The following table provides a summary of the fair values of our assets and liabilities under SFAS No. 157 (in thousands):

Fair Value Measurements at June 30, 2008 Using

Quoted Prices in Active

Significant Other

Balance as of

Markets for Identical

Observable Inputs

Significant Unobservable

Description

June 30, 2008

Assets (Level 1)

(Level 2)

Inputs (Level 3)

Available-for-sale securities

$

22,065

$

22,065

$

—

$

—

Fair value is based upon quoted market prices in active markets. We had no level 2 or level 3 assets at June 30, 2008. We review and reassess the fair value hierarchy classifications on a quarterly basis. Changes from one quarter to the next related to the observability of inputs to a fair value measurement may result in a reclassification between hierarchy levels.

7. Stock-based Compensation

In 2007, we adopted two equity incentive plans that authorized an aggregate of 4,500,000 shares of common stock for awards to employees, directors and consultants. These plans authorize the issuance of equity-based compensation in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares and units, and other stock-based awards to qualified employees, directors and consultants.

As of June 30, 2008, a total of 728,000 shares are available for issuance under our equity compensation plans and 3,772,000 options to purchase shares of common stock were outstanding. Also, options to purchase 4,240 shares of common stock are outstanding related to our old option plans prior to the Merger in June 2007. For the three-month period ended June 30, 2008, stock compensation expense was approximately $439,000. During the three-month period ended June 30, 2008, we issued options to purchase 90,000 shares of common stock to employees and directors. At June 30, 2008, total unrecognized estimated compensation cost related to unvested stock options was approximately $4.0 million, which is expected to be recognized by March 31, 2012 using the straight-line method.

8. Long-Term Debt

A summary of our long-term debt outstanding is as follows (in thousands):

		June 30,				December 31,
		2008				2007
Notes payable to lenders		$	—			$	1,800
Discount related to warrant issuance			—				(16	)
Total, net			—				1,784
Less — current portion			—				1,784
		$	—			$	—

In November 2004, we issued $7.5 million of notes payable to lenders, the proceeds of which were unrestricted and used for general corporate purposes. The notes were payable in 30 monthly payments after the initial interest-only period that expired December 1, 2005, with a fixed interest rate of 13% and a maturity date of June 1, 2008. The notes were repaid in full in June 2008.

The lenders retain a right to receive a milestone payment of $2.25 million upon the occurrence of certain events as follows: (1) the entire amount upon (a) the merger with or into another entity where our stockholders do not hold at least a majority of the voting power of the surviving entity, (b) the sale of all or substantially all of our assets, and (c) our liquidation or dissolution; or (2) a portion of the amount from proceeds of equity financings not tied to specific research and development activities that are part of a research or development collaboration, in which case, the senior lenders will receive an amount equal to 10% of proceeds above $5.0 million in cumulative gross proceeds until the milestone amount is paid in full. The milestone payment is payable in cash, except that if the milestone event is (2) above, we may elect to pay 75% of the milestone in shares of common stock at the per-share offering price. No amounts have been recorded in relation to the milestone as of June 30, 2008.

Upon the closing of our equity offering in June 2007, warrants to purchase 149,026 shares of common stock with an exercise price of $5.00 per share and a seven-year term were issued to our lenders in accordance with the loan agreement. The value of the warrants was $492,000 based on the Black-Scholes valuation of the underlying security, which was recognized as a debt discount over the remaining term of the loan.

9. Convertible Notes

Upon the closing of our equity offering in June 2007, convertible promissory notes issued to Angiotech Pharmaceuticals, Inc. pursuant to a collaboration, and to our bridge financing investors in 2006, were converted along with accrued interest into shares of common stock. The bridge notes, if not converted, were repayable with accrued interest at maturity, plus a repayment fee of 200% of the outstanding principal. We 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 into common stock upon the closing of our equity offering in June 2007.

10. Warrants

As of June 30, 2008, we had the following outstanding warrants to purchase shares of common stock:

Number of underlying shares				Exercise Price			Expiration
	4,976,470			$	6.00		June 8, 2012
	149,026			$	5.00		June 8, 2014
	5,125,496

11. Income Taxes

We have net operating loss and research and development tax credit carryforwards that may be used to reduce future taxable income and tax liabilities. However, as a result of the change in ownership related to our capital restructuring and equity offering in June 2007, we lost the use of a significant portion of our pre-Merger net operating loss carryforwards under Section 382 of the Internal Revenue Code. Our deferred tax assets have been fully offset by a valuation allowance due to our cumulative losses.

12. Contingency

We initially filed a shelf registration statement with the SEC in July 2007 covering the resale of 18,508,251 shares of common stock, which includes all shares of common stock issued in our equity offering in June 2007 and shares of common stock issuable upon exercise of warrants issued in the offering (as well as the 531,781 shares of common stock issued to the bridge noteholders and the 132,945 shares underlying their warrants). The registration statement was declared effective by the SEC on October 18, 2007. Under the registration rights agreement entered into in connection with our June 2007 equity offering, subject to certain exceptions, if the registration statement ceases to remain effective, a 1% cash penalty will be assessed for each 30-day period until the registration statement becomes effective again, capped at 10%. Because the penalty is based on the number of unregistered shares of common stock held by the investors in our June 2007 equity offering, our maximum penalty exposure will decline over time as investors sell their shares of common stock that were included in the registration statement.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This discussion and analysis should be read in conjunction with our financial statements and notes thereto included in this Quarterly Report on Form 10-Q and the audited financial statement and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2007. Operating results are not necessarily indicative of results that may occur in future periods.

Overview and Recent Developments

We are a biopharmaceutical company engaged in the discovery and development of therapeutic product candidates designed to extend and enhance the quality of human life. Through the application of our proprietary technologies, we have established a pipeline of therapeutic product development programs in multiple diseases and conditions. In July 2007, we initiated a Phase I clinical trial in the United Kingdom with our lead candidate in clinical development (ATHX-105 for the treatment of obesity) and completed the trial in January 2008. The primary objective of the Phase I clinical trial was to assess the short-term safety of ATHX-105 and to establish an appropriate dose range for subsequent clinical studies conducted in order to assess safety and effectiveness. There were no severe or serious adverse events observed in the clinical trial, no negative effects on cardiovascular, hematology or other clinical parameters, and no discontinuations due to adverse events. Upon regulatory approval which we anticipate in the second half of 2008, we intend to initiate a Phase II clinical trial in the United States that will examine safety and effectiveness in clinically obese patients. We are also developing pharmaceutical products for the treatment of certain conditions affecting the central nervous system, such as ADHD, narcolepsy and other cognitive or attention disorders.

In the fourth quarter of 2007, we received FDA authorization to advance two MultiStem® product development programs into clinical trials, in the areas of transplant support and for treatment of damage from myocardial infarction. The application of MultiStem for certain cardiovascular applications, including myocardial infarction, is being developed with our partner, Angiotech Pharmaceuticals, Inc. We have recently initiated both of these trials and intend to file an additional investigational new drug application, or IND, for treatment of ischemic stroke in the second half of 2008. In addition to these programs, we are also developing MultiStem for certain other disease indications.

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.

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.

We have incurred losses since inception of operations in December 1995 and had an accumulated deficit of $169 million at June 30, 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, such as RAGE, and to acquire our stem cell technology. 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 from our collaborators and grant proceeds 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. Our expenses are expected to increase as we expand our business development activities and support our operating activities. 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 tables set forth our revenues and expenses for the periods indicated. The following tables are stated in thousands.

Revenues

		Three months ended								Six months ended
		June 30,								June 30,
		2008				2007				2008				2007
License fees		$	453			$	313			$	843			$	623
Grant revenue			323				410				725				979
		$	776			$	723			$	1,568			$	1,602

Research and development expenses

		Three months ended								Six months ended
		June 30,								June 30,
Type of expense		2008				2007				2008				2007
Personnel costs		$	801			$	849			$	1,566			$	1,446
Research supplies			199				155				382				359
Facilities			201				184				412				375
Clinical and preclinical development costs			1,534				625				3,832				1,433
Sponsored research			106				48				211				181
Patent legal fees			395				385				625				661
Other			331				743				664				868
Stock-based compensation			170				2,000				360				2,031
		$	3,737			$	4,989			$	8,052			$	7,354

General and administrative expenses

		Three months ended								Six months ended
		June 30,								June 30,
Type of expense		2008				2007				2008				2007
Personnel costs		$	476			$	641			$	965			$	999
Facilities			86				74				173				151
Legal and professional fees			210				197				506				279
Other			340				496				675				574
Stock-based compensation			269				2,089				543				2,102
		$	1,381			$	3,497			$	2,862			$	4,105

Three Months Ended June 30, 2008 and 2007

Revenues. Revenues increased to $776,000 for the three months ended June 30, 2008 from $723,000 in the comparable period in 2007. License fee revenue increased $140,000 for the three months ended June 30, 2008 compared to the three months ended June 30, 2007. The increase in license fee revenue was a result of the nature and timing of target acceptances under our collaboration agreement with Bristol-Myers Squibb. Grant revenue decreased $87,000 for the three months ended June 30, 2008 compared to the three months ended June 30, 2007. The decrease in grant revenue was due to the timing of expenditures that are reimbursed with grant proceeds.

Research and Development Expenses.  Research and development expenses decreased to $3.7 million for the three months ended June 30, 2008 from $5.0 million in the comparable period in 2007. The decrease of approximately $1.3 million related primarily to a decrease in stock compensation expense of $1.8 million and a decrease in other expenses of $412,000 in the three months ended June 30, 2008 compared to the comparable period in 2007. The decrease in other expenses for the three months ended June 30, 2008 was primarily a result of milestone payment in the comparable period in 2007 in the amount of $507,000 associated with a collaboration related to our stem cell technology. These decreases were partially offset primarily by an increase in clinical and preclinical development costs of $909,000 related to preparations for a Phase II clinical trial of ATHX-105 and two Phase I clinical trials related to MultiStem. Our clinical costs for the three months ended June 30, 2008 are reflected net of Angiotech’s cost-sharing amount related to our MultiStem acute myocardial infarction collaboration in the amount of $269,500. We expect these expenses to continue to increase in 2008 as we expect to initiate our ATHX-105 Phase II clinical trial and two or more MultiStem clinical trials. 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 $1.4 million for the three months ended June 30, 2008 from $3.5 million in the comparable period in 2007. The decrease of $2.1 million relates primarily to a $1.8 million decrease in stock compensation expense, a $156,000 decrease in other expenses and a $153,000 decrease in personnel and facilities costs. Included in other expenses for the three-month period ended June 30, 2007 was a one-time advisory fee of $350,000 related to the merger, which is the primary reason for the decrease in other expenses. Included in personnel costs in the three months ended June 30, 2007 was approximately $308,000 of bonus expenses that were tied to the achievement of certain milestones and is the primary reason for the decrease in personnel costs.

Depreciation. Depreciation expense decreased to $52,000 for the three months ended June 30, 2008 from $75,000 for the comparable period in 2007. The decrease was due to more equipment becoming fully depreciated.

Other Income. In May 2007, we sold certain non-core assets related to its asthma drug discovery program to a pharmaceutical company for $2.0 million, of which $1.5 million was received at closing and recorded in other income. The remaining $500,000 was received and recognized as other income in August 2007 upon our delivery of certain ancillary assets related to the program.

Interest Income.  Interest income represents interest income earned on our cash and available-for-sale securities. Interest income increased to $286,000 for the three months ended June 30, 2008 from $175,000 for the comparable period in 2007 due to the increase in our average cash balances as a result of our equity offering in June 2007. Due to declining interest rates and lower cash balances as a result of our ongoing and planned clinical and preclinical development, we expect our 2008 interest income to decline over the remaining quarters of 2008.

Interest Expense.  Interest expense decreased to $31,000 for the three months ended June 30, 2008 from $710,000 for the comparable period in 2007. Interest expense in the three-month period ended June 30, 2008 consists primarily of interest on our senior loan. Included in interest expense for the three-month period ended June 30, 2007 is interest on our senior loan and subordinated convertible promissory notes issued to our bridge investors in October 2006 and to Angiotech, which were converted into common stock upon the closing of our equity offering in June 2007. Unless we enter into a new debt arrangement, we expect our interest expense to decrease in the second half of 2008 as a result of the repayment at maturity of our senior loan in June 2008.

Accretion of Premium on Convertible Debt.  The accretion of premium on convertible debt for the three months ended June 30, 2007 relates to the subordinated convertible promissory notes issued to bridge investors in October 2006. The notes, if not converted, were repayable with accrued interest at maturity, plus a repayment fee of 200% of the outstanding principal. We 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 into common stock upon the closing of our equity offering in June 2007.

Deemed Dividend. In connection with the merger in 2007, all shares of Athersys’ convertible preferred stock were converted into common stock, which resulted in a deemed dividend in the amount of $4.8 million from the induced conversion associated with the change in the conversion ratios. This amount is reflected as an increase to the net loss attributable to common stockholders for the three months ended June 30, 2007.

Six Months Ended June 30, 2008 and 2007

Revenues. Total revenues were comparable for the six months ended June 30, 2008 and 2007. Grant revenue decreased $254,000 for the six months ended June 30, 2008 compared to the six months ended June 30, 2007. The decrease in grant revenue was due to the timing of expenditures that are reimbursed with grant proceeds. License fee revenue increased $220,000 for the six months ended June 30, 2008 compared to the six months ended June 30, 2007. The increase in license fee revenue over this period was a result of the nature and timing of target acceptances under our collaboration agreement with Bristol-Myers Squibb.

Research and Development Expenses.  Research and development expenses increased to $8.1 million for the six months ended June 30, 2008 from $7.4 million in the comparable period in 2007. The increase of approximately $700,000 related primarily to an increase in clinical and preclinical development costs of $2.4 million, an increase in personnel, research supplies and facilities costs of $180,000 and an increase in sponsored research of $30,000 in the six months ended June 30, 2008 compared to the comparable period in 2007. These increases were partially offset by a decrease in stock compensation expense of $1.7 million, a decrease in other expenses of $204,000 and a decrease in patent legal fees of $36,000 in the six months ended June 30, 2008 compared to the comparable period in 2007. The $2.4 million increase in preclinical and clinical costs was a result of the continuation of the ATHX-105 clinical trial, which was completed in January 2008, preparation for a Phase II clinical trial of ATHX-105, which includes certain non-clinical studies, and preparation for Phase I clinical trials for MultiStem in 2008. Our clinical costs for the six months ended June 30, 2008 are reflected net of Angiotech’s cost-sharing amount related to our MultiStem acute myocardial infarction collaboration in the amount of $462,000. We expect these expenses to continue to increase in 2008 as we expect to initiate our ATHX-105 Phase II clinical trial and continue two MultiStem clinical trials that were recently initiated. The decrease in other expenses for the six months ended June 30, 2008 was primarily a result of milestone payment in 2007 in the amount of $507,000 associated with a collaboration related to our stem cell technology. 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 $2.9 million for the six months ended June 30, 2008 from $4.1 million in the comparable period in 2007. The decrease of $1.2 million relates primarily to a $1.6 million decrease in stock compensation expense. This decrease was partially offset by an increase in legal, professional and consulting fees of $227,000 and an increase in other expenses of $101,000. The increase in legal and professional fees for the six months ended June 30, 2008 was primarily a result of accounting and auditing fees incurred in connection with our annual audit and annual report, legal fees incurred in connection with our annual report and fees for our board of directors. The increase in other expenses for the six-month period ended June 30, 2008 was primarily a result of costs such as printing costs for SEC filings, Nasdaq listing fees, directors’ and officers’ insurance costs, investor and public relations costs and costs related to compliance with Section 404 of the Sarbanes-Oxley Act of 2002.

Depreciation. Depreciation expense decreased to $109,000 for the six months ended June 30, 2008 from $155,000 for the comparable period in 2007. The decrease was due to more equipment becoming fully depreciated.

Other Income. In May 2007, we sold certain non-core assets related to its asthma drug discovery program to a pharmaceutical company for $2.0 million, of which $1.5 million was received at closing and recorded in other income. The remaining $500,000 was received and recognized as other income in August 2007 upon our delivery of certain ancillary assets related to the program.

 

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