Vericel Corp - Quarter Report: 2014 June (Form 10-Q)

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

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

 

FOR THE QUARTERLY PERIOD ENDED June 30, 2014,

 

OR

 

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

 

FOR THE TRANSITION PERIOD FROM            TO           

 

Commission file number 0-22025

 

AASTROM BIOSCIENCES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

(800) 556-0311

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

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 - x   No - o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes - x   No - o

 

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

 

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

 

 

 

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AASTROM BIOSCIENCES, INC.

QUARTERLY REPORT ON FORM 10-Q

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			Page
PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited):		1
	Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013		1
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2014 and 2013		2
	Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30, 2014 and 2013		3
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013		4
	Notes to Condensed Consolidated Financial Statements		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		23
Item 4.	Controls and Procedures		24
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings		25
Item 1A.	Risk Factors		25
Item 6.	Exhibits		41
Signature			42
Exhibit Index
Glossary

 

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PART I - FINANCIAL INFORMATION

 

Item 1.                                                         Financial Statements

 

AASTROM BIOSCIENCES, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, amounts in thousands)

 

		June 30,			December 31,
		2014			2013
ASSETS
Current assets:
Cash		$	7,263		$	8,059
Accounts receivable		4,317			8
Inventory		1,922			—
Other current assets		610			409
Total current assets		14,112			8,476
Property and equipment, net		2,387			739
Intangible assets		3,337			—
Total assets		$	19,836		$	9,215
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses		$	9,845		$	2,676
Accrued employee benefits		1,732			620
Short-term debt		2,500			6
Warrant liabilities		2,974			2,019
Total current liabilities		17,051			5,321
COMMITMENTS AND CONTINGENCIES (Note 16)
Shareholders’ equity:
Series B-2 voting convertible preferred stock, no par value: shares authorized and reserved — 39, shares issued and outstanding — 12		38,389			38,389
Common stock, no par value; shares authorized — 75,000 and 15,000; shares issued and outstanding — 7,019 and 4,723, respectively		262,789			253,270
Other comprehensive income		5			—
Accumulated deficit		(298,398		)	(287,765		)
Total shareholders’ equity		2,785			3,894
Total liabilities and shareholders’ equity		$	19,836		$	9,215

 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

 

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AASTROM BIOSCIENCES, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, amounts in thousands except per share amounts)

 

		Quarter Ended June 30,						Six Months Ended June 30,
		2014			2013			2014			2013
Revenues:
Product sales		$	4,432		$	3		$	4,432		$	11
Total revenues		4,432			3			4,432			11
Costs and expenses:
Cost of product sales		5,009			1			5,009			3
Gross profit (loss)		(577		)	2			(577		)	8
Research and development		4,364			3,676			7,635			9,214
Selling, general and administrative		3,581			1,560			4,954			3,193
Total operating expenses		7,945			5,236			12,589			12,407
Loss from operations		(8,522		)	(5,234		)	(13,166		)	(12,399		)
Other income (expense):
(Increase) decrease in fair value of warrants		248			345			(1,104		)	1,964
Bargain purchase gain		3,634			—			3,634			—
Interest income		4			3			6			8
Interest expense		(2		)	(3		)	(3		)	(6		)
Total other income (expense)		3,884			345			2,533			1,966
Net loss		$	(4,638	)	$	(4,889	)	$	(10,633	)	$	(10,433	)
Net loss per share attributable to common shareholders (Basic and Diluted) (see note 12)		$	(0.94	)	$	(2.72	)	$	(2.18	)	$	(5.75	)
Weighted average number of common shares outstanding (Basic and Diluted)		6,518			2,283			6,195			2,263

 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

 

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AASTROM BIOSCIENCES, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited, amounts in thousands)

 

		Quarter Ended June 30,						Six Months Ended June 30,
		2014			2013			2014			2013
Net loss		$	(4,638	)	$	(4,889	)	$	(10,633	)	$	(10,433	)
Other comprehensive income
Foreign currency translation		5			—			5			—
Comprehensive loss		$	(4,633	)	$	(4,889	)	$	(10,628	)	$	(10,433	)

 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

 

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AASTROM BIOSCIENCES, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, amounts in thousands)

 

		Six Months Ended June 30,
		2014			2013
Operating activities:
Net loss		$	(10,633	)	$	(10,433	)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization		246			275
Stock compensation expense		451			383
Change in fair value of warrants		1,104			(1,964		)
Bargain purchase gain		(3,634		)	—
Unrealized currency translation gain		5			—
Changes in operating assets and liabilities:
Inventories		278			—
Accounts receivable		(4,256		)	24
Other current assets		(10		)	92
Accounts payable and accrued expenses		4,594			87
Accrued employee benefits		1,112			75
Net cash used for operating activities		(10,743		)	(11,461		)
Investing activities:
Acquisition of CTRM business, net of cash acquired		1,050			—
Property and equipment purchases		(14		)	(40		)
Net cash provided by (used for) investing activities		1,036			(40		)
Financing activities:
Net proceeds from issuance of common stock and warrants		8,917			2,378
Principal payments under long-term debt obligations		(6		)	(21		)
Net cash provided by financing activities		8,911			2,357
Net decrease in cash		(796		)	(9,144		)
Cash at beginning of period		8,059			13,638
Cash at end of period		$	7,263		$	4,494
Supplemental cash flow information (non-cash):
Accretion of convertible preferred stock		$	2,891		$	2,577
Acquisition of business through issuance of promissory note		$	2,500		$	—
Warrants exchanged for common stock		$	149		$	—

 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE QUARTER ENDED JUNE 30, 2014 (UNAUDITED)

 

NOTE 1— ORGANIZATION:

 

Aastrom Biosciences, Inc. (the Company or Aastrom) was incorporated in March 1989 and began employee-based operations in 1991. On May 30, 2014, Aastrom completed its acquisition of certain assets of Sanofi, a French société anonyme (Sanofi), including all of the outstanding equity interests of Genzyme Biosurgery ApS (Genzyme Denmark), a wholly-owned subsidiary of Sanofi, and over 250 patents and patent applications and assumed certain liabilities for purposes of acquiring the portions of the cell therapy and regenerative medicine business (the CTRM Business). The CTRM Business researches, develops, manufactures, markets and sells the Carticel®, MACITM and Epicel®  products. As a result, the Company has exited the development stage, and is now a fully integrated, commercial-stage biopharmaceutical company dedicated to the identification, development and commercialization of innovative therapies that enable the body to repair and regenerate damaged tissues and organs to restore normal structure and function.  Aastrom has marketed products as well as developmental stage product candidates and the Company’s goal is to become the leader in cell therapy and regenerative medicine by developing, manufacturing and marketing best-in-class therapies for patients with significant unmet medical needs.

 

The Company operates its business in one reportable segment — the research, product development, manufacture and distribution of patient-specific, expanded cellular therapies for use in the treatment of specific diseases.

 

Successful future operations are subject to several technical hurdles and risk factors, including satisfactory product development, timely initiation and completion of clinical trials, regulatory approval and market acceptance of the Company’s products, successful integration and profitability of the CTRM Business and the Company’s continued ability to obtain future funding.

 

NOTE 2— LIQUIDITY:

 

The Company is subject to certain risks related to the operation of its business and development of its products and product candidates.  As of June 30, 2014, the Company had $7.3 million of cash.  This is not sufficient to sustain operations for one year.  In light of its financial position, the Company is evaluating strategic financial opportunities in the short-term in order maintain adequate liquidity through December 31, 2014 and beyond.  The Company could sell an additional net $9.3 million worth of common shares through an At the Market Sales Agreement (ATM) or direct Lincoln Park Capital Fund, LLC (Lincoln Park) to purchase up to $11.8 million worth of shares of common shares under the Purchase Agreement between the Company and Lincoln Park in order to raise additional capital, though there are certain factors, such as volume of trading in the stock, the stock price and the ability to terminate the agreement with notice, which could limit the amount the Company could raise in a short period of time.  See Note 14, “Shareholders’ Equity” for additional information. On a longer-term basis, the Company will need to raise additional funds in order to complete product development programs and complete clinical trials needed to market and commercialize its products.  The Company cannot be certain that such funding will be available on favorable terms, if at all.  Some of the factors that will impact the Company’s ability to raise additional capital and our overall success include: the degree of success achieved in integrating and the revenue produced by the newly acquired CTRM Business, the rate and degree of progress for product development, the Company’s ability to maintain its facility as a U.S. Food and Drug Administration (FDA) compliant and validated product manufacturing facility, the rate of regulatory approval to proceed with clinical trial programs, the level of success achieved in clinical trials, the requirements for marketing authorization from regulatory bodies in the United States and other countries, the liquidity and market volatility of the Company’s equity securities, regulatory and manufacturing requirements and uncertainties, technological developments by competitors, and other factors.  If the Company cannot raise such funds, the Company will not be able to develop or enhance its products, take advantage of future opportunities, or respond to competitive pressures or unanticipated requirements, which would have a material adverse impact on the business, financial condition and results of operations.  As a result of the need to raise additional capital, there is uncertainty regarding the Company’s ability to maintain liquidity sufficient to operate the business effectively over at least the next twelve months, which raises substantial doubt as to the ability to continue as a going concern.  The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

NOTE 3 — BASIS OF PRESENTATION:

 

The condensed consolidated financial statements included herein have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (SEC).  The preparation of condensed consolidated financial statements in conformity with generally accepted accounting principles in the United States of America (U.S. GAAP) requires management to make estimates, judgments, and assumptions that may affect the reported amounts of assets, liabilities, equity, revenues and expenses. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to such rules and regulations. The financial statements reflect, in the opinion of management, all adjustments (consisting only of normal, recurring adjustments) necessary to state fairly the financial position and results of operations as of and for the periods indicated.  The results of operations for the six months ended June 30, 2014, are not necessarily indicative of the results to be expected for the full year or for any other period.  The

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE QUARTER ENDED JUNE 30, 2014 (UNAUDITED) (CONTINUED)

 

December 31, 2013 condensed consolidated balance sheet data was derived from the Company’s audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP.

 

These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the period ended December 31, 2013, as filed with the SEC on March 13, 2014 (Annual Report).

 

The consolidated financial statements include the accounts of Aastrom and its wholly-owned subsidiaries, Aastrom Biosciences GmbH, located in Berlin, Germany, Marrow Donation, LLC, located in San Diego, California, and Aastrom Biosciences DK ApS, in Kastrup, Demark (collectively, the Company).  All inter-company transactions and accounts have been eliminated in consolidation.  Aastrom Biosciences GmbH has ceased operations.

 

NOTE 4 —SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NEWLY ISSUED ACCOUNTING STANDARDS:

 

During the six months ended June 30, 2014, the Company added certain policies and procedures as a result of its acquisition of the commercialized CTRM Business.  There were no other changes to the significant accounting policies described in the Company’s audited financial statements as of and for the year ended December 31, 2013, and the notes thereto, which are included in the Annual Report.

 

Inventories

 

Inventories are measured at the lower of cost or market value. Cost is calculated using the first-in, first-out method.  Utilization reserves are established for estimated obsolescence or un-marketable inventory in an amount equal to the cost of inventory.

 

Accounts Receivable

 

Accounts receivable is initially recorded at the contractual amount owed by the customer.  Allowances for doubtful accounts are established when the facts and circumstances dictate that the asset has been impaired.

 

Property, Plant and Equipment

 

Property, plant and equipment are initially measured and recognized at acquisition cost, including any directly attributable cost of preparing the asset for its intended use or, in the case of assets acquired in a business combination, at fair value as at the date of the combination.

 

After initial measurement, property, plant and equipment are carried at cost less accumulated depreciation and impairment.

 

Repair and maintenance costs of property, plant and equipment are expensed as incurred.

 

The depreciable value of property, plant and equipment, net of any residual value, is depreciated on a straight line basis over the useful life of the asset. The useful life of an asset is usually equivalent to its economic life.

 

The useful lives of property, plant and equipment are as follows:

 

·                  Equipment and computers:  3 to 5 years

·                  Furniture and fixtures:  5 years

·                  Building improvements and leasehold improvements:  Shorter of the remaining life of the lease or 15 years

 

Useful lives and residual values of property, plant and equipment are reviewed at each reporting date. The effect of any adjustment to useful lives or residual values is recognized prospectively as a change of accounting estimate.

 

Intangible Assets

 

Intangible assets are initially measured at acquisition cost, including any directly attributable costs of preparing the asset for its intended use or, in the case of assets acquired in a business combination at fair value as at the date of the combination.  Identifiable intangible assets related to product rights are amortized on a straight-line basis over their expected useful lives.

 

The useful lives of intangible assets are reviewed at each reporting date.  The effect of any adjustment to useful lives is recognized prospectively as a change of accounting estimate.

 

Amortization of intangible assets is recognized in these financial statements under Costs of Product Sales.

 

Intangible assets are carried at cost less accumulated amortization and impairment.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE QUARTER ENDED JUNE 30, 2014 (UNAUDITED) (CONTINUED)

 

Impairment of Intangible Assets and Other Long-Lived Assets

 

Intangible assets and long-lived assets are assessed for potential impairment when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recovered. An impairment loss would be recognized when an asset’s fair value, determined based on undiscounted cash flows expected to be generated by the asset, is less than its carrying amount. The impairment loss would be measured as the amount by which the asset’s carrying value exceeds its fair value and recognized in these financial statements.

 

Foreign Currency Translation

 

Assets and liabilities of Genzyme Denmark are translated from Danish Krone into U.S. dollars using the applicable exchange rates in effect at the period end.  Expenses of the operations in Denmark are translated from the applicable currencies into U.S. dollars using average exchange rates for the reported period.

 

Revenue Recognition

 

Revenue arising from the sale of products is presented in these financial statements in Total revenues. Total revenues were comprised of revenue from sales of Carticel, Epicel, bone marrow, and surgical kits.  Revenue is recognized from product sales when persuasive evidence of an arrangement exists, the goods are shipped or delivered, depending on shipping terms, title and risk of loss pass to the customer and collectability is reasonably assured.

 

Revenue is recorded net of a provision, made at the time of sale, for rebates, chargebacks and cash discounts. These revenue reductions are established by the Company at the time of sale, based on historical experience adjusted to reflect known changes in the factors that impact such reserves.  Distributors are entitled to chargeback incentives for services that are provided for based on the selling price to the end customer, under specific contractual arrangements. Cash discounts may also be granted for prompt payment.

 

Because Epicel is a humanitarian use device, Aastrom does not sell Epicel for a profit.  The amount charged does not exceed the costs of the research, development, fabrication and distribution of the product.

 

Research and Development Expense

 

Research and development activities represent a significant part of the Company’s business.  These expenditures relate to the development of new products, improvement of existing products, technical support of products and compliance with governmental regulations for the protection of consumers and patients.  Research and development expenses are expensed as incurred.

 

Newly issued Accounting Standards

 

In May 2014, the Financial Accounting Standards Board (FASB) issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 merges revenue recognition standards of the FASB and International Accounting Standards Board (IASB). The FASB and IASB initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards (IFRS) that would: (1) remove inconsistencies and weaknesses in revenue requirements; (2) provide a more robust framework for addressing revenue issues; (3) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; (4) provide more useful information to users of financial statements through improved disclosure requirements; and (5) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. The standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2016, and interim periods within those annual periods. The Company is currently evaluating the potential impact of this new guidance on its consolidated financial statements.

 

NOTE 5—ACQUISITIONS:

 

CTRM Business acquisition

 

On May 30, 2014, Aastrom completed its acquisition of certain assets of Sanofi, including all of the outstanding equity interests of Genzyme Denmark, a wholly-owned subsidiary of Sanofi, and over 250 patents and patent applications and assumed certain liabilities for purposes of acquiring portions of the CTRM Business. Aastrom is a leading developer of patient-specific, expanded multicellular therapies for the treatment of severe, chronic cardiovascular diseases.  The acquired CTRM business, also a leading developer of patient-specific expanded cellular therapies, expands the Company’s portfolio of cellular therapies to include products which treat severe burns and as well as cartilage defects.  The acquired business also transforms the company into a fully integrated commercial business, and brings with it manufacturing, marketing and sales capabilities. This transaction provides a platform to generate operating income to support the development of pipeline products and possible additional strategic transactions. Pursuant to the terms of the asset purchase agreement, in consideration for the sale of the CTRM Business, the Company paid a total purchase price of $6.5 million, including $4.0 million in cash and a $2.5 million promissory note with interest accruing at the short term applicable federal rate in effect on the May 30, 2014, prepayable without prepayment penalty, and due upon the earliest to occur of (i) July 30, 2014, (ii) a liquidation, dissolution or winding up of the Company, or (iii) a sale of the Company.

 

The total purchase price consideration is as follows:

 

Acquisition consideration (in 000’s):		Fair Value
Cash payment		$	4,000
Promissory note		2,500
Total acquisition consideration		$	6,500

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE QUARTER ENDED JUNE 30, 2014 (UNAUDITED) (CONTINUED)

 

The Company recognized tangible and intangible assets and liabilities acquired based upon their respective estimated fair values as of the acquisition date. The table below shows the preliminary fair values assigned to the assets acquired and liabilities assumed. Based on this analysis, the transaction resulted in a bargain purchase gain. We may make additional adjustments to the fair values, and these valuations could change significantly from those used to determine certain adjustments in the pro forma condensed combined financial statements.

 

The preliminary purchase price allocation is as follows:

 

Purchase price allocation (in 000’s):		Fair Value
Cash		$	5,050
Accounts receivable		53
Inventory		2,200
Other current assets		192
Accounts payable and accrued expenses		(2,539		)
Property and equipment		1,818
Intangible assets		3,360
Bargain purchase gain		(3,634		)
Total consideration		$	6,500

 

As part of the acquisition, $5.0 million in cash was received from Sanofi in order to fund the restructuring of the Denmark operations and close the facility.  To date we have recorded restructuring charges of $3.0 million and expect to incur additional costs in the second half of 2014.  See Note 6 “Restructuring” below for additional information.

 

The intangible assets acquired represent commercial use rights for certain products acquired in the transaction. This estimated fair value was determined using the income approach based on projected cash flows attributed to the commercial rights. The calculated value of the commercial rights intangible assets are amortized using the straight-line method over an estimated useful life of twelve years.

 

The identifiable intangible assets acquired and their estimated useful lives are summarized as follows:

 

(in 000’s)		Fair Value			Useful Life
Commercial rights		$	3,360		12 years

 

The following unaudited pro forma condensed combined information for the three month period ending June 30, 2014, and 2013, respectively and the six month period ending June 30, 2014, and 2013, respectively are presented as if the acquisition of the CTRM Business had occurred on January 1, 2013.

 

These unaudited pro forma condensed combined statements should be read in connection with the Company’s historical combined financial statements and notes thereto filed with the SEC. In management’s opinion, all adjustments necessary to reflect the significant effects of this transactions have been made. These statements are based on assumptions and estimates considered appropriate by our management; however, they are unaudited and are not necessarily, and should not be assumed to be, an indication of our financial position or results of operations that would have been achieved had the acquisitions been completed as of the dates indicated or that may be achieved in the future.

 

		Three Months Ended						Six Months Ended
(in 000’s)		June 30, 2014			June 30, 2013			June 30, 2014			June 30, 2013
Pro forma revenue		$	10,096		$	10,610		$	20,542		$	20,948
Pro forma net loss		(9,032		)	(11,255		)	(20,460		)	(25,251		)
Pro forma net loss per share — basic and diluted		$	(1.61	)	$	(5.50	)	$	(3.77	)	$	(12.30	)

 

Revenue and net loss included in the condensed consolidated financial statements include one month of operations related to the CTRM Business since the May 30, 2014 acquisition and are $4.4 million and $(2.7 million), respectively. The net loss related to the CTRM business includes the restructuring costs described below as well as $231 thousand of expenses from the Genzyme Denmark subsidiary that the Company is in the process of shutting down.

 

NOTE 6—RESTRUCTURING:

 

On June 16, 2014, the Company announced a strategic plan to maximize the profitability and growth potential of the CTRM Business (the Plan).  Under the Plan, the Company intends to discontinue manufacturing MACI® in Denmark, temporarily cease sales of MACI ® in Europe, and significantly reduce research and development expenses associated with MACI®.  Furthermore, the Company has eliminated approximately 80 full time employee positions, which represented approximately 30% of the Company’s current total workforce.  Employees terminated as part the Plan are being provided with severance payments and outplacement assistance.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE QUARTER ENDED JUNE 30, 2014 (UNAUDITED) (CONTINUED)

 

As a result of the Plan, the Company recorded a restructuring charge of $3.0 million in the three months ended June 30, 2014 related to the operations in the United States and Denmark, primarily representing cash payments for severance and other personnel-related expenses.  Of the total restructuring charge, $2.4 million was recorded in cost of product sales, and $0.6 million was recorded in selling, general and administrative expenses. The restructuring reserve decreased to $2.6 million as of June 30, 2014 as a result of cash payments made for severance and other personnel-related expenses. In addition to restructuring charges recorded in the second quarter, the Company may incur the following costs in the future: lease termination costs of approximately $0.6 million, and stay-on bonuses of $0.2 million.  These costs will be recognized when appropriate.  The Company currently expects to complete the Plan by the end of the fourth quarter of 2014.  The Company acquired an asset retirement obligation of $1.6 million related to the obligation to restore the Denmark facility to its original state. The Company is currently attempting to sell the leasehold improvement and transfer the lease obligation in order to avoid incurring the restoration costs.

 

NOTE 7 — STOCK—BASED COMPENSATION

 

The Company issues nonqualified and incentive stock options as well as other equity awards pursuant to its 2009 Omnibus Incentive Plan, as amended (Option Plan).  Such awards pursuant to the Option Plan may be granted by the Company’s Board of Directors to certain of the Company’s employees, directors and consultants.

 

During the three and six months ended June 30, 2014, the Company granted 128,000 and 242,025, respectively, service-based options to purchase common stock.  These options were granted with exercise prices equal to the fair market value of the Company’s stock at the grant date, generally vest over four years and expire after ten years.  The weighted average grant-date fair value of service-based options granted under the Option Plan during the three month period ended June 30, 2014 and 2013 was $3.11 and $6.78, respectively.  The weighted average grant-date fair value of service-based options granted under the Option Plan during the six month period ended June 30, 2014 and 2013 was $2.85 and $15.00, respectively.

 

The net compensation expense recorded for the service-based stock options related to employees and directors was $0.2 million and $0.5 million for the three and six months ended June 30, 2014, respectively, compared to $426 thousand and $383 thousand for the three and six month periods ended June 30, 2013, respectively.  The compensation cost includes forfeiture adjustments.

 

The fair value of each service-based stock option grant for the reported periods is estimated on the date of the grant using the Black-Scholes option-pricing model using the weighted average assumptions noted in the following table.

 

		Six Months Ended June 30,
Service-Based Stock Options		2014		2013
Expected dividend rate		0	%	0	%
Expected stock price volatility		82.4 – 88.2	%	74.0-80.7	%
Risk-free interest rate		1.66 – 2.2	%	0.1- 1.4	%
Expected life (years)		5.5 – 6.25		5.0 - 6.3

 

The following table summarizes the activity for service-based stock options for the indicated periods:

 

Service-Based Stock Options		Options		Weighted Average Exercise Price			Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Outstanding at December 31, 2013		297,860		$	39.53		7.9		$	—
Granted		242,025		$	3.91
Exercised		—		$	—				$	—
Expired		(9,676	)	$	47.58
Forfeited		(23,240	)	$	32.44
Outstanding at June 30, 2014		506,969		$	22.69		8.3		$	57,599
Exercisable at June 30, 2014		191,888		$	40.24		6.62		$	—

 

As of June 30, 2014 there was approximately $0.9 million of total unrecognized compensation cost related to non-vested service-based stock options granted under the Option Plan.  That cost is expected to be recognized over a weighted-average period of 3.19 years.

 

The total fair value of options vested during the six months ended June 30, 2014 and 2013 was $1.0 million and $1.4 million, respectively.

 

NOTE 8—BALANCE SHEET COMPONENTS:

 

Inventories:

 

(in 000’s)		June 30, 2014
Raw materials		$	867
Work-in-process		582
Finished goods		473
Inventories		$	1,922

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE QUARTER ENDED JUNE 30, 2014 (UNAUDITED) (CONTINUED)

 

		June 30, 2014			December 31, 2013
Property and equipment, net: (in 000’s)
Equipment and computers		$	3,949		$	3,024
Furniture and fixtures		722			706
Buildings, building improvements and leasehold improvements		1,656			1,018
Construction in progress		368			77
Total property and equipment, gross		6,695			4,825
Less: Accumulated depreciation		(4,308		)	(4,086		)
		$	2,387		$	739

 

		As of June 30, 2014
Intangible assets, net (in 000’s)		Gross Amount			Accumulated Amortization			Net Amount
Commercial rights		$	3,360		$	(23	)	$	3,337

 

Amortization expenses were $0.02 million and $0 for the three and six month periods ended June 30, 2014 and 2013, respectively. The increase in intangible assets, net from December 31, 2013 to June 30, 2014 is due to the acquisition of the CTRM Business.

 

Estimated future amortization expense, which includes the preliminary estimates of amortization for the assets acquired through the initial closing of the CTRM Business acquisition, is as follows:

 

Calendar Years Ending December 31, (in 000’s)
2014		$	163
2015		280
2016		280
2017		280
2018		280
Thereafter		2,077
Total		$	3,360

 

(in 000’s)		June 30, 2014			December 31, 2013
Accounts payable and accrued expenses:
Accounts payable to vendors		$	2,909		$	2,355
Accrued accounts payable		2,505			294
Restructuring reserve		2,605			—
Asset retirement obligation		1,600			—
Other		226			27
Total accounts payable and accrued expenses		$	9,845		$	2,676

 

Accumulated other comprehensive income

 

The components of accumulated other comprehensive income, net of taxes were as follows:

 

		June 30, 2014
		Foreign Currency translation adjustment, net of taxes
Beginning balance		$	—
Foreign currency translation		5
Net loss reclassified into earnings		—
Total		$	5

 

NOTE 9—FAIR VALUE MEASUREMENTS:

 

The Company’s fair value measurements are classified and disclosed in one of the following three categories:

 

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

 

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FOR THE QUARTER ENDED JUNE 30, 2014 (UNAUDITED) (CONTINUED)

 

Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability;

 

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

 

The following table summarizes the valuation of the Company’s investments and financial instruments that are measured at fair value on a recurring basis:

 

		June 30, 2014												December 31, 2013
					Fair value measurement category												Fair value measurement category
(In 000’s)		Total			Level 1			Level 2			Level 3			Total			Level 1			Level 2			Level 3
Liabilities:
Warrant liabilities		$	2,974		$			$	2,766		$	208		$	2,019		$	—		$	1,934		$	85

 

The Company has historically issued warrants to purchase shares of the Company’s common stock in connection with certain of its common stock offerings.

 

The following table summarizes the change in the estimated fair value of the Company’s warrant liabilities:

 

Warrant Liabilities (in 000’s)
Balance at December 31, 2013		$	2,019
Warrant exercise		(149		)
Increase in fair value		1,104
Balance at June 30, 2014		$	2,974

 

A reconciliation of beginning and ending balances for the Company’s fair value measurements using Level 3 inputs is as follows:

Warrants: 

 

		Three Months Ended			Six Months Ended
(in 000’s)		June 30, 2014			June 30, 2014
Beginning balance		$	196		$	85
Increase in fair value		12			123
Ending balance		$	208		$	208

 

NOTE 10—STOCK PURCHASE WARRANTS:

 

The Company has historically issued warrants to purchase shares of the Company’s common stock in connection with certain of its common stock offerings.  The following warrants were outstanding at June 30, 2014, and include provisions that could require cash settlement of the warrants or have anti-dilution price protection provisions requiring each to be recorded as liabilities of the Company at the estimated fair value at the date of issuance, with changes in estimated fair value recorded as non-cash income or expense in the Company’s statement of operations in each subsequent period:

 

		January 2010 Class A Warrants			December 2010 Warrants			August 2013 Warrants
Exercise price		$	18.09		$	3.30		$	4.80
Expiration date		July 21, 2015			December 15, 2015			August 16, 2018
Total shares issuable on exercise		226,299			15,405			1,087,450

 

The fair value of the Class A warrants and the December 2010 warrants are measured using the Monte Carlo valuation model.  The methodology is based, in part, upon inputs for which there is little or no observable market data, requiring the Company to develop its own

 

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FOR THE QUARTER ENDED JUNE 30, 2014 (UNAUDITED) (CONTINUED)

 

assumptions. The assumptions used in calculating the estimated fair value of the warrants represent the Company’s best estimates, however; these estimates involve inherent uncertainties and the application of management judgment.  As a result, if factors change and different assumptions are used, the warrant liabilities and the change in estimated fair value of the warrants could be materially different.

 

Inherent in the Monte Carlo valuation model are assumptions related to expected stock-price volatility, expected life, risk-free interest rate and dividend yield.  The Company estimates the volatility of its common stock based on historical volatility that matches the expected remaining life of the warrants.  The risk-free interest rate is based on the U.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected remaining life of the warrants.  The expected life of the warrants is assumed to be equivalent to their remaining contractual term.  The dividend rate is based on the historical rate, which the Company anticipates to remain at zero.

 

The Monte Carlo model is used for the Class A warrants and the December 2010 warrants to value the potential future exercise price adjustments triggered by the anti-dilution provisions as well as the value of the put feature of the December 2010 warrants.  These require Level 3 inputs which are based on the Company’s estimates of the probability and timing of potential future financings and fundamental transactions.  The other assumptions used by the Company are summarized in the following tables:

 

January 2010 Class A Warrants		June 30, 2014			December 31, 2013
Closing stock price		$	4.10		$	3.23
Expected dividend rate		0		%	0		%
Expected stock price volatility		130.4		%	84.6		%
Risk-free interest rate		0.2		%	0.3		%
Expected life (years)		1.00			1.50

 

December 2010 Warrants		June 30, 2014			December 31, 2013
Closing stock price		$	4.10		$	3.23
Expected dividend rate		0		%	0		%
Expected stock price volatility		123.4		%	80.4		%
Risk-free interest rate		0.3		%	0.4		%
Expected life (years)		1.46			1.96

 

August 2013 Warrants		June 30, 2014		December 31, 2013
Closing stock price		4.10		$	3.23
Expected dividend rate		0	%	0		%
Expected stock price volatility		89.9	%	77.5		%
Risk-free interest rate		1.4	%	1.6		%
Expected life (years)		4.13		4.63

 

NOTE 11—SERIES B CONVERTIBLE PREFERRED STOCK:

 

On March 9, 2012, the Company completed the sale of 12,308 shares of Series B-1 Non-Voting Convertible Preferred Stock (Series B-1 preferred stock) at an offering price of $3,250 per share.  In addition to the Series B-1 preferred stock, which was issued at the closing, the Company also authorized Series B-2 Voting Convertible Preferred Stock (Series B-2 preferred stock).  The Series B-1 preferred stock and Series B-2 preferred stock collectively are referred to as the Series B preferred stock.  The Series B preferred stock is convertible, at the option of the holder thereof at any time after the five year anniversary of the closing of the offering, (the Conversion date) into shares of common stock at a conversion price of $3.25 per share of common stock.  At any time after the Conversion date, the Company may elect to convert any or all outstanding shares of Series B preferred stock into shares of common stock, subject to certain limitations.  Dividends on the Series B preferred stock will be cumulative and compound daily, at a rate of 11.5% per annum, payable upon conversion, liquidation, redemption or other similar events, and payable in cash or Series B-1 preferred stock until the Conversion date.  As of June 30, 2014, there are approximately 187,181 accumulated but undeclared Series B-1 dividends.  Unless prohibited by Michigan law governing distributions to shareholders, the Series B-1 preferred stock shall be redeemable at the option of holder of the Series B-1 preferred stock commencing at any

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE QUARTER ENDED JUNE 30, 2014 (UNAUDITED) (CONTINUED)

 

time after the Conversion date, liquidation, winding up, dissolution or other similar events, subject to certain terms and limitations.

 

The Series B preferred stock does not, in its entirety, require liability classification and was evaluated for embedded features to determine if those features require bifurcation and separate classification as derivative liabilities.  The Series B preferred stock host contract was evaluated for equity or mezzanine classification based upon the nature of the redemption and conversion features.  Generally, any feature that could require cash redemption for matters not within the Company’s control, irrespective of probability of the event occurring, requires classification outside of shareholders’ equity.  The Series B preferred stock was initially recorded as mezzanine in the Condensed Consolidated Balance Sheets and was accreted to its redemption value through charges to accumulated deficit using the effective interest method.

 

On August 12, 2013, the Company amended the Series B preferred stock agreement to remove the cash redemption provision, modify the liquidation preferences for the Series B-2 preferred stock and to increase the redemption price for the Series B-1 preferred stock.  The redemption price, prior to the five year anniversary, is now equal to $7,430 multiplied by the number of Series B-1 preferred shares redeemed minus the Company’s closing stock price multiplied by the number of common shares into which the outstanding Series B-2 preferred stock are convertible.  The redemption price, after the five year anniversary, is the amount equal to the greater of the Series B offering price plus accrued dividends or the conversion value in common stock.  As a result of the amendment to the agreement, the total amount of $38,389,000 Series B preferred stock was reclassified from mezzanine into shareholders’ equity.

 

NOTE 12—Net Loss Per Common Share:

 

Basic earnings (loss) per share is calculated using the two-class method, which is an earnings allocation formula that determines earnings (loss) per share for the holders of the Company’s common shares and holders of the Series B preferred stock.  The Series B preferred stock shares contain participation rights in undistributed earnings, but do not share in the losses of the Company.  The dividends on the Series B preferred stock are treated as a reduction of earnings attributable to common shareholders.

 

The following reflects the net loss attributable to common shareholders and share data used in the basic and diluted earnings per share computations using the two class method:

 

		Three Months Ended June 30,						Six Months Ended June 30,
(Amounts in 000’s except per share amounts)		2014			2013			2014			2013
Numerator:
Net loss		$	4,638		$	4,889		$	10,633		$	10,433
Less: dividends accumulated on convertible preferred stock		1,474			1,314			2,892			2,577
Numerator of basic and diluted EPS		$	6,112		$	6,203		$	13,525		$	13,010
Denominator:
Denominator for basic and diluted EPS:
Weighted-average common shares outstanding		6,518			2,283			6,195			2,263
Net loss per share attributable to common shareholders (basic and diluted)		$	(0.94	)	$	(2.72	)	$	(2.18	)	$	(5.75	)

 

Common equivalent shares are not included in the diluted per share calculation where the effect of their inclusion would be anti-dilutive.  The aggregate number of common equivalent shares (related to options, warrants and preferred stock) that have been excluded from the computations of diluted net loss per common share at June 30, 2014 and 2013 were 2,639,000 and 1,320,000, respectively.

 

NOTE 13—BORROWINGS:

 

Promissory note

 

The Company has a short term promissory note associated with the purchase of the CTRM Business. The interest rate for the principle amount is at the short term applicable federal rate in effect on May 30, 2014. The promissory note is prepayable without prepayment penalty and due upon the earliest to occur of (i) July 30, 2014, (ii) a liquidation, dissolution or winding up of the Company, or a (iii) sale of the Company. The balance outstanding on the promissory note as of June 30, 2014 was $2.5 million.  The promissory note approximates the fair value of the obligation.

 

On July 30, 2014, the Company repaid the promissory note due to Sanofi in connection with the acquisition of the CTRM Business in the amount of $2.5 million plus interest of $1.4 thousand.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE QUARTER ENDED JUNE 30, 2014 (UNAUDITED) (CONTINUED)

 

NOTE 14—SHAREHOLDERS’ EQUITY:

 

On January 21, 2014, the Company entered into a purchase agreement (Purchase Agreement), together with a registration rights agreement, for the sale of up to $15.0 million (with a remaining balance of $11.8 million) of shares of its common stock to Lincoln Park, subject to certain limitations, from time to time over a 30-month period, which began on April 3, 2014 and ends on October 3, 2016.

 

The Company may direct Lincoln Park, at its sole discretion, to purchase up to 50,000 shares of common stock in regular purchases, increasing to amounts of up to 100,000 shares depending upon the closing sale price of the common stock.  In addition, the Company may direct Lincoln Park to purchase additional amounts as accelerated purchases if on the date of a regular purchase the closing sale price of the common stock equals or exceeds $3.00 per share.  The purchase price of shares of common stock related to the future funding will be based on the prevailing market prices of such shares at the time of sales (or over a period of up to 10 business days leading up to such time), but in no event will shares be sold to Lincoln Park on a day the common stock closing price is less than the floor price of $2.50, subject to adjustment.  The Company controls the timing and amount of any sales of common stock to Lincoln Park. The Company’s sales of shares of common stock to Lincoln Park under the Purchase Agreement are limited to no more than the number of shares that would result in the beneficial ownership by Lincoln Park and its affiliates, at any single point in time, of more than 9.99% of the then outstanding shares of the common stock.

 

In connection with the Purchase Agreement, in the six months ended June 30, 2014, the Company issued to Lincoln Park 772,361 shares of common stock and raised $3.2 million.  Additionally, during the six months ended June 30, 2014, the Company raised net proceeds of $5.3 million utilizing the ATM. At June 30, 2014 there was approximately $9.3 million of net capacity remaining on the ATM.

 

NOTE 15—CONCENTRATION OF CREDIT RISK

 

Revenue from one third party customer in the U.S. represented 76% of total revenue during the three and six month period ended June 30, 2014.  Reported revenue reflects sales related to the acquisition of the CTRM Business from Sanofi since May 30, 2014.  No other customer represented more than 10% of net sales.

 

NOTE 16 — COMMITMENTS AND CONTINGENCIES

 

During 2013, the Company amended its operating lease with Domino’s Farms Office Park, LLC to extend the term of the lease for an additional five years, which began on May 1, 2013.  The Company now has a right to terminate on the third anniversary of the renewal, and has two five-year market value renewal options.  The Company’s leased facility includes a Class 100,000 modular manufacturing clean room, laboratories and office space.  The lease also provides the Company a right of first refusal on certain additional space.

 

In conjunction with the acquisition of the CTRM Business, the company assumed the leases for facilities in Cambridge, MA and Kastrup, Denmark.  The leases for the facilities in Cambridge and Kastrup are non-cancelable leases expiring at various dates through February 2017.

 

As of June 30, 2014, future minimum payments related to operating leases are as follows:

 

(in 000’s)		2014			2015			2016			2017			2018			More than 5			Total
Leased office space		$	1,784		$	4,088		$	4,056		$	1,196		$	333		—			$	11,457
Sales force leased auto fleet		97			194			166			57			5			—			519
Total		$	1,881		$	4,282		$	4,222		$	1,253		$	338		$	—		$	11,976

 

Rent expense for the three and six months ended June 30, 2014 was approximately $0.6 million and $0.8 million, respectively, compared to $0.3 million and $0.5 million for those same periods in 2013.

 

As part of its the acquisition of Verigen AG (Verigen), Genzyme Corporation, a subsidiary of Sanofi agreed to make cash payments to Verigen upon the achievement of developmental milestones relating to regulatory and commercialization of MACI in the United States.  If the Company further develops MACI in the U.S., it will be obligated to pay Verigen up to $15.8 million in developmental milestones relating to regulatory and commercialization of MACI in the United States. No amounts have been accrued for payments of these potential milestone payments, any amounts to be paid cannot be reasonably estimated and are not probable.

 

NOTE 17—SUBSEQUENT EVENT

 

On July 9, 2014, the Company entered into a Warrant Exercise Agreement with one holder of warrants issued by the Company on August 16, 2013 (the 2013 Warrants) to purchase an aggregate of 362,500 shares of the Company’s common stock, no par value.  Pursuant to the Warrant Exercise Agreement, the holder agreed to exercise the 2013 Warrants at the existing exercise price of $4.80.  The net proceeds to the Company in connection with the exercise of the 2013 Warrants, after deducting a warrant inducement payment, and expenses, were approximately $1.5 million.  As a result of this transaction, there are now 724,950 of the 2013 Warrants outstanding and the warrant liability has been reduced by approximately 33%.

 

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

 

Overview

 

We are a fully integrated, commercial-stage biopharmaceutical company dedicated to the identification, development and commercialization of innovative therapies that enable the body to repair and regenerate damaged tissues and organs to restore normal structure and function. Our product portfolio is comprised of patient-specific (autologous) cell therapies utilizing proprietary manufacturing processes and systems. We have marketed products as well as developmental stage product candidates and our goal is to become the leading cell therapy and regenerative medicine company by developing, manufacturing and marketing best-in-class therapies for patients with significant unmet medical needs.

 

Acquisition of Sanofi’s CTRM Business

 

On May 30, 2014 we completed the acquisition of certain assets of Sanofi, a French société anonyme (Sanofi), including all of the outstanding equity interests of Genzyme Biosurgery ApS (Genzyme Denmark), a wholly-owned subsidiary of Sanofi, and over 250 patents and patent applications of Sanofi and certain of its subsidiaries and assumed certain liabilities for purposes of acquiring the portion of the cell therapy and regenerative medicine business (the CTRM Business), which researches, develops, manufactures, markets and sells Carticel®, MACITM and Epicel® (the CTRM Transaction).

 

In consideration for the acquisition of the CTRM Business, we paid a total purchase price of approximately $6.5 million, as follows: (a) $4 million was paid in cash on the closing date of the CTRM Transaction, and (b) a $2.5 million promissory note was paid on July 30, 2014. In accordance with generally accepted accounting principles in the United States of America (U.S. GAAP), we recorded the assets and liabilities of the CTRM Business at fair value.  The net assets of the CTRM Business were preliminarily valued at $10.1 million, which is in excess of the $6.5 million purchase price, which resulted in a $3.6 million bargain purchase gain.  The primary driving factor for the bargain purchase gain was the structure of the CTRM Transaction.  As part of the CTRM Transaction, Sanofi funded Genzyme Denmark with $5.0 million in cash in order to fund the restructuring of the Denmark operations and close the facility.  Under U.S. GAAP, no restructuring actions were taken by Sanofi prior to our purchase of the CTRM Business, and accordingly, there were no restructuring related accruals in the opening balance sheet.  Additionally, there were no restrictions on the use of the cash in Genzyme Denmark.  We implemented our restructuring plans for Genzyme Denmark after the consummation of the CTRM Transaction, and accordingly, have recorded restructuring charges in our current period results of operations.  To date we have recorded restructuring charges of $3.0 million and expect to incur additional costs in the second half of 2014.  See Note 6, “Restructuring” for additional information.

 

Manufacturing

 

We acquired two cell-manufacturing facilities as part of the acquisition of the CTRM Business in Cambridge, Massachusetts and Copenhagen, Denmark. The Cambridge facility, which is approved by the U.S. Food and Drug Administration (FDA), is used for U.S. manufacturing and distribution of Carticel, Epicel manufacturing and also manufactured MACI for the SUMMIT study conducted for approval in Europe. The Copenhagen manufacturing facility, which was approved by the Danish Medicines Agency (DKMA), was responsible for MACI manufacturing and distribution in Europe. As part of the June 2014 restructuring, MACI manufacturing at the Copenhagen manufacturing facility will be discontinued. Going forward, any clinical and commercial production of MACI will occur at our Cambridge facility. We also operate a centralized cell manufacturing facility in Ann Arbor, Michigan. The facility supports the current ixCELL DCM clinical trial being conducted in the United States and Canada and has sufficient capacity, with minor modifications, to supply our early commercialization requirements.

 

Product Portfolio

 

Our approved and marketed products were acquired through the CTRM Transaction and include three approved autologous cell therapy products, each of which are further described below:  Carticel (autologous cultured chondrocytes), a first-generation product for autologous chondrocyte implantation (ACI) currently marketed in the U.S., MACI (matrix-applied characterized autologous cultured chondrocytes), a third-generation ACI product, and Epicel (cultured epidermal autografts), a permanent skin replacement for full thickness burns greater than or equal to 30% of total body surface area.  Our product candidate portfolio also includes ixmyelocel-T, a patient-specific multicellular therapy currently in development for the treatment of advanced heart failure due to ischemic dilated cardiomyopathy (DCM).

 

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Carticel

 

Carticel, a first-generation ACI product for the treatment and repair of cartilage defects in the knee, is the first and only FDA-approved autologous cartilage repair product.  Carticel is indicated for the repair of symptomatic cartilage defects of the femoral condyle (medial, lateral or trochlea) caused by acute or repetitive trauma, in patients who have had an inadequate response to a prior arthroscopic or other surgical repair procedure such as debridement, microfracture, drilling/abrasion arthroplasty, or osteochondral allograft/autograft.  Carticel received a Biologics License Application (BLA) approval in 1997 and is currently marketed in the U.S.  It is generally used on patients with larger lesions (greater than 3 cm2 ).  In the year ended December 31, 2013, net revenues were $35.2 million for Carticel.

 

In the U.S., we focus net sales of Carticel on the sports-injury-targeted orthopedic physician target audience, which is very concentrated, with 60% of the current Carticel business originating from 25% of this  audience, or approximately 110 physicians. We currently have a 23-person field force calling on these sports-injury targeted orthopedic physician audience.

 

Epicel

 

Epicel is a permanent skin replacement for full thickness burns greater than or equal to 30% of total body surface area (TBSA).  Epicel is the only FDA-approved autologous epidermal product available for large total surface area burns. Epicel was approved in the United States as a humanitarian use device (HUD) under an Humanitarian Device Exemption (HDE).  Devices eligible for an HDE are intended for diseases or conditions that occur in a maximum of 4,000 individuals annually in the United States. Currently, approximately 100 patients are treated with Epicel in the U.S. each year.  In the year ended December 31, 2013, net revenues were $7.1 million for Epicel.

 

Under the original HDE approval and pursuant to the Pediatric Medical Device Safety and Improvement Act of 2007 (PMDSIA), Epicel could not be sold for an amount that exceeds the costs of research and development, fabrication, and distribution.  In 2012, the PMDSIA was modified so that under a HDE program, a manufacturer would be allowed to sell for a profit devices intended for a condition or disease that does not occur (or only rarely occurs) in pediatric patients, so long as it meets certain other specified conditions. Prior to July 1, 2014, Epicel was being sold below standard costs and those costs allowed under the modified PMDSIA regulations.  As of July 1, 2014, we have increased the price of Epicel to reflect the full costs allowed under those regulations.  The modified PMDSIA does not cap the number of devices for which the manufacturer may obtain a profit per year at 4,000 devices, but rather assigns an “annual distribution number.” A manufacturer may not distribute more than the annual distribution number assigned by the FDA at the time the exemption is granted.  We are currently investigating the potential impact of this change on our ability to sell Epicel for a profit.

 

Up until July, 2014, we had one sales representative selling Epicel and two partially dedicated Medical Scientific Liaisons supporting Epicel inquiries. We have recently expanded the Epicel sales force to three representatives and will increase the number of burn centers called upon.

 

MACI

 

MACI is a third-generation ACI product for the treatment of focal chondral cartilage defects in the knee.  MACI received marketing authorization in Europe in July 2013 by meeting the requirements of the Advanced Therapy and Medicinal Product (ATMP) guidelines.  MACI has been commercially available in the EU since 1998.  Sales of MACI will be temporarily discontinued as part of a restructuring of the business in August 2014, primarily due to low utilization and an unfavorable pricing environment.  We believe that MACI, which is a Phase 3 product candidate in the U.S., has significant revenue potential in the U.S., and we are planning to discuss approval requirements with the FDA. The timing and process to gain approval in the U.S. and a possible reintroduction in select EU countries have not yet been determined.

 

MACI was obtained via the acquisition by Genzyme Corporation of Verigen AG in 2005.  As part of the acquisition of Verigen AG, Genzyme Corporation agreed to make cash payments upon the achievement of developmental milestones relating to regulatory and commercialization of MACI in the United States.  If we further develop MACI in the U.S., we will be obligated to pay certain developmental milestones relating to regulatory and commercialization of MACI in the United States. No amounts have been accrued for payments of these potential milestone payments, any amounts to be paid cannot be reasonably estimated and are not probable.

 

Ixmyelocel-T

 

Our preapproval stage portfolio also includes ixmyelocel-T, a unique patient-specific multicellular therapy derived from an adult patient’s own bone marrow which utilizes our proprietary, highly automated and scalable manufacturing system. Our proprietary cell manufacturing process significantly expands the mesenchymal stromal cells (MSCs) and M2-like anti-inflammatory macrophages in the patient’s bone marrow mononuclear cells while retaining many of the hematopoietic cells. These cell types are known to regulate the immune response and play a key role in tissue repair and regeneration by resolving pathologic inflammation, promoting angiogenesis, and remodeling

 

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ischemic tissue. The novelty and advantage of using ixmyelocel-T is the expansion of a unique combination of cell populations, including MSCS and M2-like macrophages, which secrete a distinct combination of angiogenic and regenerative factors, and possess the ability to remain anti-inflammatory in the face of inflammatory challenge.

 

Our lead clinical development program for ixmyelocel-T is focused on severe, chronic ischemic cardiovascular diseases. We are currently enrolling our Phase 2b ixCELL-DCM study, which is a randomized, double-blind, placebo-controlled clinical trial for patients with advanced heart failure due to ischemic DCM. Ixmyelocel-T has been granted a U.S. Orphan Drug designation by the FDA for the treatment of DCM. We also have an ongoing ixmyelocel-T clinical program for the treatment of craniofacial reconstruction and have conducted clinical studies for the treatment of critical limb ischemia.

 

The ongoing Phase 2b ixCELL-DCM clinical study is designed to treat 108 patients at approximately 35 sites in the U.S. and Canada. Patients will be followed for 12 months for the primary efficacy endpoint of MACE events, defined as all-cause deaths, all-cause hospitalizations, and unplanned outpatient or emergency department visits for IV treatment of acute worsening heart failure. Secondary endpoints include clinical, functional, structural, symptomatic, quality of life, and biomarker measures at 3, 6 and 9 months. Patients will be followed for an additional 12 months for safety. We expect to complete enrollment of the ixCELL-DCM study in 2014, and have top-line efficacy results approximately 12 months later.

 

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Results of Operations

 

NET LOSS

 

Our Net loss for the three and six months ended June 30, 2014 totaled ($4.6 million) or ($0.94) per share and ($10.6 million) or ($2.18) per share. The results for the three and six months ended June 30, 2014 include one month of operating results of the acquired CTRM Business including restructuring charges of $3.0 million, expenses for the exited Denmark business of $0.2 million and a bargain purchase gain of approximately $3.6 million.

 

The following table summarizes the effect of the CTRM Transaction on our results of operations for the three and six months ended June 30, 2014  (in thousands):

 

		For the Three Months Ended June 30, 2014									For the Six Months Ended June 30, 2014
		Legacy Business			Acquired Business			Consolidated Business			Legacy Business			Acquired Business			Consolidated Business
Total revenues		$	59		$	4,373		$	4,432		$	59		$	4,373		$	4,432
Cost of product sales		87			4,922			5,009			87			4,922			5,009
Gross profit (loss)		(28		)	(549		)	(577		)	(28		)	(549		)	(577		)
Total operating expenses		5,851			2,094			7,945			10,495			2,094			12,589
Loss from operations		(5,879		)	(2,643		)	(8,522		)	(10,523		)	(2,643		)	(13,166		)
Other income (expense)		250			—			250			(1,101		)	—			(1,101		)
Bargain purchase gain		3,634			—			3,634			3,634			—			3,634
Total other income loss		3,884			—			3,884			2,533			—			2,533
Net loss		$	(1,995	)	$	(2,643	)	$	(4,638	)	$	(7,990	)	$	(2,643	)	$	(10,633	)

 

REVENUES

 

		Three Months Ended June 30,						Six Months Ended June 30,
(in 000’s)		2014			2013			2014			2013
Segment:
Aastrom Cell Therapy		$	4,432		$	3		$	4,432		$	11
Geographic Region
United States of America		$	4,432		$	3		$	4,432		$	11

 

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