Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended March 31, 2018

 

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: 001-32966

 

OSIRIS THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

 

Maryland

 

71-0881115

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

7015 Albert Einstein Drive, Columbia, Maryland

 

21046

(Address of principal executive offices)

 

(Zip Code)

 

443-545-1800

(Registrant’s telephone number, including area code)

 

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  o No  x

 

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 definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer x

Non-accelerated filer o (Do not check if a smaller reporting company)

 

Smaller reporting company o

Emerging growth company o

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act  o

 

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.

 

Class

 

Outstanding at May 9, 2018

Common Stock, par value $0.001 per share

 

34,525,886

 

 

 



Table of Contents

 

OSIRIS THERAPEUTICS, INC.

 

INDEX

 

 

 

 

Page

 

 

 

 

 

PART I — FINANCIAL INFORMATION

 

 

 

 

 

Item 1.

 

Financial Statements

 

 

 

Unaudited Condensed Consolidated Balance Sheets — March 31, 2018 (unaudited) and December 31, 2017

3

 

 

Unaudited Condensed Consolidated Statements of Comprehensive Loss — three months ended March 31, 2018 and 2017

4

 

 

Unaudited Condensed Consolidated Statements of Cash Flows — three months ended March 31, 2018 and 2017

5

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

6

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

22

 

 

 

 

Item 4.

 

Controls and Procedures

23

 

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

 

Item 1.

 

Legal Proceedings

24

Item 1A.

 

Risk Factors

24

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

24

Item 3.

 

Defaults Upon Senior Securities

24

Item 4.

 

Mine Safety Disclosures

24

Item 5.

 

Other Information

24

Item 6.

 

Exhibits

25

 

2



Table of Contents

 

PART I — FINANCIAL INFORMATION

 

Item 1.   Financial Statements

 

OSIRIS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except per share data)

 

 

 

March 31, 2018

 

December 31, 2017

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

3,363

 

$

3,081

 

Short-term investments

 

24,503

 

24,807

 

Trade receivables, net

 

26,522

 

26,053

 

Inventory, net

 

11,016

 

11,278

 

Insurance receivable

 

4,788

 

4,788

 

Prepaid expenses and other current assets

 

3,078

 

2,920

 

Total current assets

 

73,270

 

72,927

 

Property and equipment, net

 

3,476

 

3,587

 

Other assets

 

1,831

 

1,608

 

Total assets

 

$

78,577

 

$

78,122

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable

 

$

5,843

 

$

5,269

 

Accrued expenses

 

11,039

 

9,399

 

Accrued shareholder litigation

 

18,500

 

18,500

 

Other current liabilities

 

1,764

 

1,934

 

Total current liabilities

 

37,146

 

35,102

 

Other long-term liabilities

 

2,497

 

1,626

 

Total liabilities

 

39,643

 

36,728

 

 

 

 

 

 

 

Equity

 

 

 

 

 

Common stock, $.001 par value, 90,000 shares authorized, 34,526 shares issued and outstanding at March 31, 2018 and December 31, 2017, respectively

 

35

 

35

 

Additional paid-in-capital

 

283,976

 

283,905

 

Accumulated other comprehensive loss

 

(419

)

(208

)

Accumulated deficit

 

(244,658

)

(242,338

)

Total equity

 

38,934

 

41,394

 

 

 

 

 

 

 

Total liabilities and equity

 

$

78,577

 

$

78,122

 

 

See accompanying notes to the condensed consolidated financial statements.

 

3



Table of Contents

 

OSIRIS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(amounts in thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

2017

 

Revenue

 

$

31,634

 

$

26,981

 

Cost of revenue

 

8,853

 

7,811

 

Gross profit

 

22,781

 

19,170

 

Operating expenses:

 

 

 

 

 

Research and development

 

1,547

 

1,219

 

Sales and marketing

 

16,287

 

14,733

 

General and administrative

 

7,447

 

4,859

 

Total operating expenses

 

25,281

 

20,811

 

Loss from operations

 

(2,500

)

(1,641

)

Other income, net

 

216

 

36

 

Loss before income taxes

 

(2,284

)

(1,605

)

Income tax expense

 

(36

)

(32

)

Net loss

 

(2,320

)

(1,637

)

Other comprehensive (loss) income:

 

 

 

 

 

Unrealized (loss) gain on investments available for sale

 

(211

)

198

 

Comprehensive loss

 

$

(2,531

)

$

(1,439

)

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

Basic and diluted

 

$

(0.07

)

$

(0.05

)

Weighted average common shares outstanding:

 

 

 

 

 

Basic and diluted

 

34,526

 

34,520

 

 

See accompanying notes to the condensed consolidated financial statements.

 

4



Table of Contents

 

OSIRIS THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(Unaudited)

 

 

 

Three Months ended March 31,

 

 

 

2018

 

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net loss

 

$

(2,320

)

$

(1,637

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

Realized loss on investments

 

48

 

158

 

Depreciation

 

211

 

176

 

Stock-based compensation expense

 

71

 

88

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivables, net

 

(469

)

234

 

Inventory, net

 

262

 

167

 

Prepaid expenses and other assets

 

(381

)

(406

)

Accounts payable, accrued expenses, and other liabilities

 

2,915

 

(3,020

)

Net cash provided by (used in) operating activities

 

337

 

(4,240

)

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Purchases of property and equipment

 

(100

)

(67

)

Proceeds from sale of investments

 

549

 

5,758

 

Purchases of investments

 

(504

)

(3,251

)

Net cash (used in) provided by investing activities

 

(55

)

2,440

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from the exercise of options to purchase common stock

 

 

128

 

Net cash provided by financing activities

 

 

128

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

282

 

(1,672

)

Cash at beginning of period

 

3,081

 

2,833

 

Cash at end of period

 

$

3,363

 

$

1,161

 

 

See accompanying notes to the condensed consolidated financial statements.

 

5



Table of Contents

 

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

THREE MONTHS ENDED MARCH 31, 2018 AND 2017

 

1.  Description of Business

 

Osiris Therapeutics, Inc. (“we”, “us”, “our”, “Osiris”, or the “Company”) researches, develops, manufactures and commercializes regenerative medicine products intended to improve the health and lives of patients and lower overall healthcare costs. We are headquartered in Columbia, Maryland. We continue to advance our research and development (“R&D”) by focusing on innovation in regenerative medicine, including the development of bioengineered stem cell and tissue-based products. We have achieved commercial success with products in orthopedics, sports medicine and wound care.

 

We operate in one segment and are focused on using unique tissue preservation technologies to develop viable human tissue products designed to improve wound closure and surgical outcomes for patients and physicians over standard of care alone. We have achieved commercial success with products in orthopedics, sports medicine, including the Grafix product line, Stravix, BIO4 and Cartiform.

 

We are a fully integrated company, having developed capabilities in R&D, manufacturing, marketing and sales of our products. We are focused on the long-term commercial growth of the Company through the delivery of differentiated products for use across multiple fields of medicine with clear value propositions for patients, providers and third-party payors.

 

2.  Summary of Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation

 

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Osiris Therapeutics International GmbH, which was formed in 2016. All intercompany transactions have been eliminated in consolidation. Osiris Therapeutics International GmbH does not have any operations.

 

The condensed financial statements included in this quarterly report have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States of America (“GAAP”).

 

The condensed consolidated balance sheet as of December 31, 2017 is derived from the Company’s audited financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted in accordance with the SEC’s rules and regulations for interim financial statements. This Quarterly Report on Form 10-Q should be read in conjunction with our financial statements and footnotes included in our Annual Report on Form 10-K for the years ended December 31, 2017, 2016, and 2015 (the “Annual Report”).   In the opinion of management, these condensed consolidated financial statements include all adjustments (consisting solely of normal recurring adjustments) considered necessary to fairly present the results of operations, financial position and cash flows for the periods indicated.

 

Operating results for any interim period are not necessarily indicative of the results that may be achieved for the full year.

 

Use of Estimates

 

We make certain estimates and assumptions in preparing our condensed consolidated financial statements in accordance with GAAP. These estimates and assumptions affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses for the period presented. Actual results may differ from these estimates.

 

6



Table of Contents

 

Income (Loss) per Common Share

 

Basic income (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted income (loss) per common share adjusts basic income (loss) per share for the potentially dilutive effects of common share equivalents, using the treasury stock method, and includes the incremental effect of shares that would be issued upon the assumed exercise of stock options.

 

Diluted loss per common share for the three months ended March 31, 2018 and 2017 excludes 628,501 and 727,001 of our outstanding options as of that date, respectively, as their impact on our net loss per share is anti-dilutive.

 

Concentration of Risk

 

We maintain cash and short-term investment balances in accounts that exceed federally insured limits. Our investments consist primarily of marketable securities with a total portfolio duration of approximately two years.  We have historically provided credit in the normal course of business to contract counterparties and to the end user customers and distributors of our products. Trade accounts receivable in the accompanying condensed consolidated balance sheets consist primarily of amounts due from end user customers and distributors of our products within the United States.

 

The Company’s revenue concentrations through distributors of 10% or greater are as follows:

 

 

 

Three months ended March 31,

 

Distributor

 

2018

 

2017

 

A

 

21

%

20

%

B

 

8

%

11

%

Total

 

29

%

31

%

 

 

The Company’s accounts receivable concentrations of 10% or greater are as follows:

 

 

 

March 31,

 

December 31,

 

Distributor

 

2018

 

2017

 

A

 

19

%  

24

%  

 

7



Table of Contents

 

Recently Adopted Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (“Topic 606”)”. This ASU outlines a single set of comprehensive principles for recognizing revenue under GAAP and supersedes existing revenue recognition guidance. The main principle of this ASU is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The Company adopted the new standard on a modified retrospective basis as of January 1, 2018. The Company completed a comprehensive assessment of customer contracts and concluded that the adoption of this ASU did not have a material impact on our condensed consolidated financial statements; therefore, no cumulative catch-up adjustment was recorded to prior periods.  See Note 8, “Revenue”, for additional information.

 

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”, which requires various changes to the measurement and disclosure of equity investments. Among a number of changes, this ASU eliminates the available-for-sale classification for equity securities with readily determinable fair values, and any changes in fair value of those equity securities will be included as an adjustment to earnings, rather than other comprehensive income (loss). This ASU was adopted by the Company on January 1, 2018.  As the Company did not hold any equity securities at March 31, 2018, this ASU did not have a material impact on our condensed consolidated financial statements.

 

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 203)”. This ASU addresses eight specific cash flow issues and clarifies their presentation and classification in the statement of cash flows. The Company adopted this ASU on January 1, 2018 and concluded that the adoption of this ASU did not have a material impact on our condensed consolidated financial statements.  As such, no retrospective adjustment was recorded.

 

On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the newly-enacted U.S. Tax Cuts and Jobs Act (the “Act”). SAB 118 allows registrants to include a provisional amount to account for the implications of the Act where a reasonable estimate can be made and requires the completion of the accounting no later than one year from the date of enactment of the Act or December 22, 2018.  We continue to evaluate the implications of the Act and have not made any adjustments to the provisional amounts recorded in the prior year. Additionally, the Company intends to file its 2017 U.S. income tax return in the fourth quarter of 2018 which may change our tax basis in temporary differences, tax pools, earning and profits and other elements of the income tax effects of the Act estimated as of December 31, 2017. This may result in an adjustment to the tax provision and be reflected as a re-measurement amount recorded in the financial statements during the quarter in which the U.S. tax return is filed.

 

Recently Issued Accounting Pronouncements Not Yet Adopted

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”. This ASU requires, among other things, a lessee to recognize assets and liabilities associated with the rights and obligations attributable to most leases but also recognize expenses similar to current lease accounting. This ASU also requires certain qualitative and quantitative disclosures designed to assess the amount, timing and uncertainty of cash flows arising from leases, along with additional key information about leasing arrangements. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The new guidance must be adopted using a modified retrospective transition and provides for certain practical expedients. The Company is in the process of analyzing initial data gathered to evaluate the impact of adopting this ASU on its consolidated financial statements, the related systems required to capture the increased reporting and disclosures associated with this ASU, and its use of practical expedients. The Company will apply this ASU and its related updates on a modified retrospective basis as of January 1, 2019. The adoption of the guidance will likely have a material effect on the consolidated balance sheets, resulting in the recording of an operating lease asset and liability.

 

8



Table of Contents

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326)”. The guidance eliminates the probable initial recognition threshold that was previously required prior to recognizing a credit loss on financial instruments. The credit loss estimate can now reflect an entity’s current estimate of all future expected credit losses. Under the previous guidance, an entity only considered past events and current conditions. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The adoption of certain amendments of this guidance must be applied on a modified retrospective basis and the adoption of the remaining amendments must be applied on a prospective basis. We currently expect that the adoption of this guidance will likely change the way we assess the collectability of our receivables and recoverability of other financial instruments. We have not yet begun to evaluate the specific impacts of this guidance nor have we determined the manner in which we will adopt this guidance.

 

In February 2018, FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”.  This ASU gives entities the option to reclassify the disproportionate income tax effects caused by the Act from accumulated other comprehensive income to retained earnings. The update also requires new disclosures, some of which are applicable for all entities. The guidance in ASU 2018-02 is effective for annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial statements and the timing of adoption although we do not believe the impact of adoption will be material.

 

3. Investments

 

Our investments consisted of the following as of March 31, 2018 and December 31, 2017:

 

 

 

March 31, 2018

 

(in $000’s)

 

Amortized
Cost

 

Gross
Unrealized
Gain

 

Gross
Unrealized
Loss

 

Estimated
Fair Value

 

U.S. government agencies

 

$

5,574

 

$

 

$

(116

)

$

5,458

 

Obligations of government sponsored enterprises (1)

 

4,235

 

1

 

(53

)

4,183

 

Corporate debt securities

 

12,390

 

11

 

(187

)

12,214

 

Foreign government bonds

 

2,690

 

 

(42

)

2,648

 

Total

 

$

24,889

 

$

12

 

$

(398

)

$

24,503

 

 


(1) Includes investments in notes issued by the Federal Home Loan Bank and the Federal Farm Credit Bank.

 

 

 

December 31, 2017

 

(in $000’s)

 

Amortized
Cost

 

Gross
Unrealized
Gain

 

Gross
Unrealized
Loss

 

Estimated
Fair Value

 

U.S. government agencies

 

$

6,077

 

$

 

$

(73

)

$

6,004

 

Obligations of government sponsored enterprises (1)

 

3,737

 

 

(31

)

3,706

 

Corporate debt securities

 

12,479

 

21

 

(66

)

12,434

 

Foreign government bonds

 

2,689

 

 

(26

)

2,663

 

Total

 

$

24,982

 

$

21

 

$

(196

)

$

24,807

 

 


(1) Includes investments in notes issued by the Federal Home Loan Bank and the Federal Farm Credit Bank.

 

9



Table of Contents

 

The following tables summarize the securities with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2018 and December 31, 2017:

 

 

 

March 31, 2018

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

(in $000’s)

 

Fair
Value

 

Unrealized
Loss

 

Fair
Value

 

Unrealized
Loss

 

Fair
Value

 

Unrealized
Loss

 

U.S. government agencies

 

$

573

 

$

(3

)

$

4,885

 

$

(113

)

$

5,458

 

$

(116

)

Obligations of government sponsored enterprises (1)

 

1,300

 

(5

)

2,384

 

(48

)

3,684

 

(53

)

Corporate debt securities

 

1,957

 

(12

)

7,727

 

(175

)

9,684

 

(187

)

Foreign government bonds

 

599

 

(3

)

2,049

 

(39

)

2,648

 

(42

)

Total

 

$

4,429

 

$

(23

)

$

17,045

 

$

(375

)

$

21,474

 

$

(398

)

 


(1) Includes investments in notes issued by the Federal Home Loan Bank and the Federal Farm Credit Bank.

 

 

 

December 31, 2017

 

 

 

Less than 12 Months

 

12 Months or More

 

Total

 

(in $000’s)

 

Fair
Value

 

Unrealized
Loss

 

Fair
Value

 

Unrealized
Loss

 

Fair
Value

 

Unrealized
Loss

 

U.S. government agencies

 

$

1,073

 

$

(3

)

$

4,931

 

$

(70

)

$

6,004

 

$

(73

)

Obligations of government sponsored enterprises (1)

 

1,298

 

(6

)

2,408

 

(25

)

3,706

 

(31

)

Corporate debt securities

 

1,667

 

(5

)

7,286

 

(61

)

8,953

 

(66

)

Foreign government bonds

 

597

 

(3

)

2,066

 

(23

)

2,663

 

(26

)

Total

 

$

4,635

 

$

(17

)

$

16,691

 

$

(179

)

$

21,326

 

$

(196

)

 


(1) Includes investments in notes issued by the Federal Home Loan Bank and the Federal Farm Credit Bank.

 

As of March 31, 2018 and December 31, 2017, there were no material unrealized losses that the Company believed to be other-than-temporary.

 

The following table summarizes maturities of our investments available-for-sale as of March 31, 2018:

 

 

 

March 31, 2018

 

(in $000’s)

 

Cost

 

Fair Value

 

Maturities:

 

 

 

 

 

Within 1 year

 

$

5,536

 

$

5,516

 

After 1 year through 5 years

 

19,353

 

18,987

 

Total investments available for sale

 

$

24,889

 

$

24,503

 

 

Realized losses net of investment income was $48 thousand and $158 thousand, respectively, for the three months ended March 31, 2018 and 2017, respectively, and have been included as a component of “Other income, net” in the accompanying unaudited condensed consolidated statements of comprehensive loss.

 

10



Table of Contents

 

4. Inventory, net

 

Inventory, net consisted of the following:

 

 

 

March 31,

 

December 31,

 

(in $000’s)

 

2018

 

2017

 

Raw materials and supplies

 

$

1,300

 

$

1,330

 

Work-in-process

 

5,144

 

5,605

 

Finished goods

 

7,318

 

6,350

 

 

 

13,762

 

13,285

 

Reserve for excess and obsolete inventory

 

(2,746

)

(2,007

)

Inventory, net

 

$

11,016

 

$

11,278

 

 

Work-in-process inventory is largely product that is in quarantine pending completion of our quality assurance procedures. Finished goods inventory included gross consigned inventory of $1.9 million and $1.5 million as of March 31, 2018 and December 31, 2017, respectively. This consigned finished goods inventory was reduced by reserves of $0.7 million and $0.6 million as of March 31, 2018 and December 31, 2017, respectively.

 

5. Property and Equipment, net

 

Property and equipment, net, consisted of the following:

 

 

 

Depreciable Life

 

March 31,

 

December 31,

 

(in $000’s)

 

(in years)

 

2018

 

2017

 

Laboratory and manufacturing equipment

 

3-7

 

$

3,162

 

$

3,083

 

Computer hardware, furniture and fixtures

 

3-7

 

1,141

 

1,134

 

Leasehold improvements

 

(A)

 

6,359

 

6,344

 

 

 

 

 

10,662

 

10,561

 

Accumulated depreciation and amortization

 

 

 

(7,186

)

(6,974

)

Property and equipment, net

 

 

 

$

3,476

 

$

3,587

 

 


(A) Shorter of economic life or lease term.

 

Depreciation expense was $0.2 million for both the three months ended March 31, 2018 and 2017.

 

11



Table of Contents

 

6. Accrued Liabilities

 

Accrued liabilities consisted of the following:

 

 

 

March 31,

 

December 31,

 

(in $000’s)

 

2018

 

2017

 

Payroll and related

 

$

1,726

 

$

1,980

 

Commissions

 

4,979

 

5,651

 

Legal and accounting

 

2,794

 

905

 

Lease liabilities

 

321

 

120

 

Other

 

1,219

 

743

 

Total

 

$

11,039

 

$

9,399

 

 

7. Financial Instruments and Fair Value

 

Fair value is defined as the price at which an asset could be exchanged or a liability transferred (an exit price) in an orderly transaction between knowledgeable, willing parties in the principal or most advantageous market for the asset or liability. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied.

 

Financial assets recorded at fair value in the accompanying financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The levels are directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities and are as follows:

 

Level 1

Inputs are unadjusted, quoted prices in active markets for identical assets at the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

 

 

Level 2

Inputs are other than quoted prices included in Level 1, which are either directly or indirectly observable for the asset or liability through correlation with market data at the reporting date and for the duration of the instrument’s anticipated life.

 

 

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities and which reflect management’s best estimate of what market participants would use in pricing the asset or liability at the reporting date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

 

     When quoted prices in active markets for identical assets are available, we use these quoted market prices to determine the fair value of financial assets and classify these assets as Level 1. In other cases where a quoted market price for identical assets in an active market is either not available or not observable, we obtain the fair value from a third party vendor that uses pricing models, such as matrix pricing, to determine fair value. These financial assets would then be classified as Level 2. In the event quoted market prices were not available, we would determine fair value using broker quotes or an internal analysis of each investment’s financial statements and cash flow projections. In these instances, financial assets would be classified based upon the lowest level of input that is significant to the valuation. Thus, financial assets might be classified in Level 3 even though there could be some significant inputs that may be readily available.

 

12



Table of Contents

 

Assets and liabilities measured at fair value on a recurring basis are summarized below as of March 31, 2018 and December 31, 2017:

 

 

 

March 31, 2018

 

(in $000’s)

 

Level I

 

Level II

 

Level III

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

Investments: Available for Sale Securities

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

 

$

5,458

 

$

 

$

5,458

 

Obligations of government sponsored enterprises

 

 

4,183

 

 

4,183

 

Corporate debt securities

 

 

12,214

 

 

12,214

 

Foreign government bonds

 

 

2,648

 

 

2,648

 

Total investments available for sale

 

$

 

$

24,503

 

$

 

$

24,503

 

 

 

 

December 31, 2017

 

(in $000’s)

 

Level I

 

Level II

 

Level III

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

Investments: Available for Sale Securities

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

 

$

6,004

 

$

 

$

6,004

 

Obligations of government sponsored enterprises

 

 

3,706

 

 

3,706

 

Corporate debt securities

 

 

12,434

 

 

12,434

 

Foreign government bonds

 

 

2,663

 

 

2,663

 

Total investments available for sale

 

$

 

$

24,807

 

$

 

$

24,807

 

 

8. Revenue

 

The Company began accounting for revenue in accordance with Topic 606, which we adopted beginning January 1, 2018, using the modified retrospective method. Under the new revenue standard for arrangements that are determined to be within the scope of Topic 606, the Company recognizes revenue following the five-step model: (i) identify the contract(s) with a customer; (ii) identify the performance obligation(s) in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.  The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services promised within each contract and determines the performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

 

Accordingly, the Company recognizes revenue when title to the product, ownership and risk of loss transfer to the customer, which is either the date of receipt by the customer or when we receive appropriate notification that the product has been used or implanted. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to in exchange for transferring the goods. The nature of the Company’s contracts gives rise to certain types of variable consideration, including rebates and other discounts. The Company includes estimated amounts of variable consideration in the transaction price to the extent that it is probable there will not be a significant reversal of revenue. Estimates are based on historical or anticipated performance and represent our best judgment at the time. Any estimates are evaluated on a quarterly basis until the uncertainty is resolved.

 

The Company provides a variety of products and services to its customers. Most of the Company’s contracts consist of a single, distinct performance obligation or promise to transfer goods to a customer. For contracts that include multiple performance obligations, the Company allocates the total transaction price to each performance obligation using our best estimate of the standalone selling price of each identified performance obligation.

 

The Company’s incremental costs of obtaining a contract would generally have less than a one-year duration; therefore, the Company applies the practical expedient available and expenses costs to obtain a contract when incurred.

 

13



Table of Contents

 

The following table presents our revenues disaggregated by product line:

 

 

 

Three months ended March 31,

 

(in $000’s)

 

2018

 

2017

 

Grafix/Stravix

 

$

22,621

 

$

19,437

 

BIO4

 

6,796

 

5,367

 

Cartiform

 

2,216

 

2,144

 

Other

 

1

 

33

 

Total

 

$

31,634

 

$

26,981

 

 

9.  Income Taxes

 

We calculate our interim tax provision in accordance with the guidance for accounting for income taxes in interim periods. At the end of each interim period, we estimate the annual effective tax rate and apply that tax rate to our ordinary quarterly pre-tax income from continuing operations. The tax expense or benefit related to significant, unusual or extraordinary discrete events during the interim period is recognized in the interim period in which those events occurred. In addition, the effect of changes in enacted tax laws or rates or tax status is recognized in the interim period in which the change occurs.  On December 22, 2017, the U.S. enacted the Act, which significantly changed U.S. tax law. The Act lowered the Company’s U.S. statutory federal income tax rate from 35% to 21% effective January 1, 2018. For the three months ended March 31, 2018 and 2017, the tax expense was $36 thousand and $32 thousand, respectively, and is primarily related to interest and penalties.  A full valuation allowance has been recorded on the net deferred tax assets as of March 31, 2018 and December 31, 2017.

 

10. Commitments and Contingencies

 

Operating Leases

 

We lease facilities and equipment under various non-cancellable operating lease agreements expiring through 2023. As of March 31, 2018, the Company’s total future minimum lease payments under non-cancelable operating leases were $7.2 million.

 

Legal

 

The Company is party to outstanding legal proceedings, investigations and claims as described below. The Company cannot predict with any certainty the final outcome of any legal proceedings, investigations (including any settlement discussions with the government seeking to resolve such investigations) or claims made against it as described in the paragraphs below, and there can be no assurance that the ultimate resolution of any such matter will not have a material adverse impact on the Company’s consolidated financial position, results of operations, or cash flows.

 

The Company records accruals for certain outstanding legal proceedings, investigations or claims when it is probable that a liability will be incurred and the amount of the loss can be reasonably estimated. The Company evaluates, on a quarterly basis, developments in legal proceedings, investigations and claims that could affect the amount of any accrual, as well as any developments that would make a loss contingency both probable and reasonably estimable. When a loss contingency is not both probable and reasonably estimable, the Company does not accrue the loss. However, if the loss (or an additional loss in excess of the accrual) is at least a reasonable possibility and material, then the Company discloses a reasonable estimate of the possible loss or range of loss, if such reasonable estimate can be made. If the Company cannot make a reasonable estimate of the possible loss, or range of loss, then that is disclosed.

 

The assessments of whether a loss is probable or a reasonable possibility, and whether the loss or range of loss is reasonably estimable, often involve a series of complex judgments about future events. Among the factors that the Company considers in this assessment are the nature of existing legal proceedings, investigations and claims, the asserted or possible damages or loss contingency (if reasonably estimable), the progress of the matter, existing law and precedent, the opinions or views of legal counsel and other advisers, the involvement of the U.S. Government and its agencies in such proceedings, the Company’s experience in similar matters and the experience of other companies, the facts available to the Company at the time of assessment, and how the Company intends to respond, or has responded, to the proceeding,

 

14



Table of Contents

 

investigation or claim. The Company’s assessment of these factors may change over time as individual proceedings, investigations or claims progress. For matters where the Company is not currently able to reasonably estimate the range of reasonably possible loss, the factors that have contributed to this determination include the following: (i) the damages sought are indeterminate, or an investigation has not manifested itself in a filed civil or criminal complaint, (ii) the matters are in the early stages, (iii) the matters involve novel or unsettled legal theories or a large or uncertain number of actual or potential cases or parties, and/or (iv) discussions with the government or other parties in matters that may be expected ultimately to be resolved through negotiation and settlement have not reached the point where the Company believes a reasonable estimate of loss, or range of loss, can be made. In such instances, the Company believes that there is considerable uncertainty regarding the timing or ultimate resolution of such matters, including a possible eventual loss, fine, penalty or business impact, if any.

 

The Company does not accrue for estimated legal fees and other directly related costs as they are expensed as incurred.

 

In addition to the matters described in the paragraphs below, in the normal course of its business, the Company is involved in various lawsuits from time to time and may be subject to certain other contingencies, none of which we believe to be material.

 

Based on our analysis and assessment as described above, including consultation with our legal counsel, management believes there are no matters that are probable or reasonably possible that require accrual or disclosure, except for the matters described below.

 

Securities Class Action

 

On November 23, 2015, a putative class action lawsuit was filed in the United States District Court for the District of Maryland by a single plaintiff, individually and on behalf of other persons similarly situated, against the Company and three current or former executive officers of the Company. An amended complaint clarifying plaintiff’s claims was filed on April 6, 2018.  The action, captioned Kiran Kumar Nallagonda v. Osiris Therapeutics, Inc. et al., Case 1:15-cv-03562 (the “Nallagonda Action”), alleges, among other things, that the defendants made materially false or misleading statements and material omissions in the Company’s filings with the SEC in violation of the federal securities laws. The complaint seeks certification as a class action, unspecified damages and reimbursement of attorneys’ fees. On March 21, 2016, the court entered an order appointing Dr. Raffy Mirzayan as lead plaintiff and the firm of Hagens Berman Sobol Shapiro LLP as lead counsel. On March 11, 2018, we entered into a memorandum of understanding to settle the Nallagonda Action. A memorandum of understanding is not a definitive settlement agreement. By the terms of the memorandum, the Company agreed in principle to a total payment of $18.5 million in cash.  On March 28, 2018, the court entered an order instructing the parties to submit a notice of dismissal by May 28, 2018 and staying the proceedings until that time.

 

The Company recorded the $18.5 million shareholder settlement in Settlement of SEC and shareholders actions, net of the $4.8 million estimated insurance recovery in the consolidated statement of comprehensive income (loss) in 2015. The $18.5 million shareholder settlement liability was recorded in Accrued shareholder litigation in the Company’s condensed consolidated balance sheets as of March 31, 2018 and December 31, 2017.

 

The Company had a $5.0 million executive and corporate securities liability insurance policy in place at the time of the allegations. The Company expects to recover the remaining $4.8 million of unused policy coverage for the shareholder settlement of the Nallagonda Action in 2018. The $4.8 million insurance recovery was recorded as an offset to the $18.5 million settlement in the Company’s consolidated statement of comprehensive income (loss) for the fourth quarter of 2015. The $4.8 million insurance receivable was recorded in Insurance receivable in the Company’s condensed consolidated balance sheets as of March 31, 2018 and December 31, 2017.

 

Shareholder Derivative Actions

 

On March 2, 2016, a shareholder derivative complaint was filed in the Circuit Court for Howard County in the State of Maryland (Case No. 13C16106811) by a single plaintiff, derivatively and on behalf of the Company, against certain current and former directors and certain former executive officers. This action, captioned Kevin Connelley v. Lode Debrabandere et al., alleges that each of the individual directors and officers named as defendants (i) violated their fiduciary duties to the Company’s shareholders; (ii) abused their ability to control and influence the Company; (iii) engaged in gross mismanagement of the assets and business of the Company; and (iv) was unjustly enriched at the expense of, and to the detriment of, the Company. The alleged claims generally relate to the matters that are the subject of the Nallagonda Action. The plaintiff seeks, among other things, unspecified monetary damages, reimbursement of

 

15



Table of Contents

 

attorneys’ fees and shareholder votes on amendments to the Company’s Articles of Incorporation and Bylaws with respect to various corporate governance policies. On June 2, 2016, the Court entered an order that, subject to certain qualifications, stayed the action until 30 days after the entry of an order either: (1) denying all motions to dismiss in the Nallagonda Action, or (2) finally dismissing the Nallagonda Action with prejudice.  On March 12, 2018, the plaintiff filed an amended complaint clarifying his claims.

 

On February 9, 2017, a shareholder derivative complaint was filed in the United States District Court for the District of Maryland (Case No. 1:17-cv-00381-JKB) by a single plaintiff, derivatively and on behalf of the Company, against certain current and former directors. This action, captioned Recupero v. Friedli et al., alleges, among other things, that each of the individual directors named as defendants (i) violated their fiduciary duties to the Company’s shareholders, including that such violations constituted constructive fraud; (ii) engaged in gross mismanagement of the assets and business of the Company; and (iii) was unjustly enriched at the expense of, and to the detriment of, the Company. The plaintiff seeks, among other things, unspecified monetary damages, reimbursement of attorneys’, accountants’ and experts’ fees, and that the Company take all necessary actions to improve and comply with corporate governance, internal procedures and existing laws. On March 28, 2017, the Court entered an order that stays the action until: (1) the Nallagonda Action is dismissed with prejudice and all appeals relating thereto have been exhausted; (2) all motions to dismiss the Nallagonda Action are denied; or (3) either party provides 30 days’ notice that they no longer consent to a stay.  On April 5, 2018, the plaintiff filed an amended complaint clarifying her claims.

 

On May 11, 2017, a shareholder derivative complaint was filed in the Circuit Court for Howard County in the State of Maryland, (Case No. 13C17111441) by a single plaintiff, derivatively on behalf of the Company, against certain former executive officers and certain current and former directors. The action, captioned Brian Lee v. Peter Friedli, et. al., alleges that each of the individual defendants violated their fiduciary duties by allegedly failing to adopt and implement adequate accounting and financial reporting systems and for allegedly causing the Company to make false and misleading statements regarding its financial condition. The alleged claims generally relate to the matters that are the subject of the Nallagonda Action and seek substantially similar relief. On September 5, 2017, the defendants moved to either stay or dismiss the plaintiffs’ complaint. That motion was subsequently withdrawn. On February 14, 2018, the plaintiff filed an amended derivative complaint. No defendant has yet responded to that pleading.

 

On December 21, 2017, a shareholder derivative action was filed in the United States District Court for the District of Maryland (Case No. 1:17-cv-03777) by a single plaintiff, derivatively and on behalf of the Company, against certain former executive officers and certain current and former directors. The action, captioned Todd Salley v. Lode Debrabandere, et. al., alleges that each of the individual defendants violated their fiduciary duties by failing to maintain adequate internal controls and by causing the Company to make false and misleading statements regarding the Company’s financial condition. The alleged claims generally relate to the matters that are the subject of the Nallagonda Action and seek substantially similar relief. No defendant has yet responded to the complaint.

 

The Company has reached an agreement-in-principle with the plaintiffs in the shareholder derivative actions to resolve the derivative matters by adopting certain governance changes.  We expect that the plaintiffs will seek recovery of attorney’s fees. We cannot currently predict whether or not we will be able to reach a final settlement with the derivative plaintiffs, and if so, the amount of attorney’s fees we may be required to pay, if any. We also can provide no assurance that the courts will approve any final settlement reached with the derivative plaintiffs.  While we believe it is reasonably possible that we will incur losses associated with the shareholder derivative actions, it is not possible to estimate the amount of loss, if any, that might result from any settlements or other resolution. The Company will continue to evaluate information as it becomes known and will record an estimate for losses at the time or times when it is both probable that a loss has been incurred and the amount of the loss is reasonably estimable.

 

16



Table of Contents

 

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

 

CAUTIONARY STATEMENTS ABOUT FORWARD-LOOKING INFORMATION

 

This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 21E of the Exchange Act. Statements included or incorporated herein which are not historical facts are forward looking statements. When used in this Form 10-Q, the words “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,” “believes,” “forecasts,” “will” and variations of such words or similar expressions are intended to identify forward-looking statements, but these terms are not the exclusive means of identifying forward looking statements.

 

Forward-looking statements reflect management’s current views with respect to future events and performance and are based on currently available information and management’s assumptions regarding future events. While management believes that its assumptions are reasonable, forward-looking statements are subject to various known and unknown risks and uncertainties and actual results may differ materially from those expressed or implied herein. In connection with the “safe harbor provisions” of the Private Securities Litigation Reform Act of 1995, we note that certain factors, among others, which could cause future results to differ materially from the forward-looking statements, expectations and assumptions expressed or implied herein are discussed in greater detail under Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part I, Item 1A, “Risk Factors” of our Annual Report and may be discussed elsewhere herein or in other documents we file with the SEC. Examples of forward-looking statements may include, without limitation, statements regarding any of the following: risks relating to the restatement of certain of our 2014 and 2015 financial information (the “restatement”) and related legal proceedings; our delisting from the NASDAQ Stock Market (“NASDAQ”); the outcome of pending legal proceedings and government investigations; our ability to improve our internal control over financial reporting, including our ability to remediate material weaknesses; our product development efforts; our ability to successfully navigate regulatory requirements applicable to our products and product candidates; the success of our product candidates in development; implementation of our corporate strategy; our financial performance; our research and development activities and projected expenditures; our anticipated timeline and commercialization strategy for our products under development; our cash needs; patents, trademarks and other proprietary rights; the safety and ability of our products to perform as intended or expected; our ability to supply a sufficient amount of our marketed products or product candidates and, if or insofar as approved or otherwise commercially available, future products to meet demand; our ability to commercialize and distribute our current and any future marketed products; our relationships with third parties with whom we contract; our ability to maintain and benefit from our arrangements with third parties; our costs to comply with governmental regulations; our plans for or success of sales and marketing; our plans regarding manufacturing; our ability to establish and maintain, and the ability of our customers and end users to obtain, reimbursement for our commercially available products from Medicare and other third-party payors; types of regulatory frameworks we expect will be applicable to our products and potential products; and results of our scientific research.

 

Except as otherwise required by law, we undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances and do not intend to do so.

 

You should read the following management’s discussion and analysis of our financial condition and results of operations in conjunction with our audited financial statements and related notes thereto and other disclosures included as part of our Annual Report, and our unaudited condensed consolidated financial statements for the three months period ended March 31, 2018 and other disclosures included in this Quarterly Report on Form 10-Q.

 

Our unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, and are presented in U.S. dollars.

 

When we use the terms “Osiris,” “we,” “us,” and “our” we mean Osiris Therapeutics, Inc., a Maryland corporation.

 

17



Table of Contents

 

Overview of Osiris

 

Osiris Therapeutics, Inc. researches, develops, manufactures, markets and sells regenerative medicine products intended to improve the health and lives of patients and lower overall healthcare costs. We have achieved commercial success with products in orthopedics, sports medicine and wound care, including the Grafix product line, Stravix, BIO4 and Cartiform. We continue to advance our R&D by focusing on innovation in regenerative medicine, including the development of bioengineered stem cell and tissue-based products.

 

We are a fully integrated company, having developed capabilities in research and development, manufacturing, marketing and sales of our products. We are focused on the long-term commercial growth of the Company through the delivery of differentiated products for use across multiple fields of medicine with clear value propositions to patients, healthcare providers and third-party payors.

 

We began operations in 1992 and were a Delaware corporation until, with the approval of our stockholders, we reincorporated as a Maryland corporation in May 2010.

 

Our business focuses on using unique tissue preservation technologies to develop viable human tissue products designed to improve wound closure and surgical outcomes for patients and physicians over standard of care alone.

 

We have built a substantial direct sales force dedicated exclusively to sell our Grafix and Stravix products and entered into exclusive agreements to market and distribute BIO4 and Cartiform.

 

Current Products

 

All of our current commercialized products are marketed as human cells, tissues and cellular and tissue-based products (“HCT/Ps”), as defined by the United States Food and Drug Administration (“FDA”), that are regulated solely under Section 361 of the Public Health Service Act (“361 HCT/Ps”), and consequently, do not require pre-market approval from the FDA.

 

Our current products are:

 

Grafix is a product line of several products, Grafix PRIME, Grafix XC and Grafix CORE, and was initially launched in 2010. They are cryopreserved placental membranes that retain the extracellular matrix, growth factors, endogenous cells, including neonatal mesenchymal stem cells, and fibroblasts of the native tissue, all of which are beneficial in supporting natural wound repair. Grafix PRIME and Grafix XC (a larger size for surgical applications) are derived from the amnion and Grafix CORE is derived from the chorion. The amnion is the innermost membrane and the chorion is the outermost membrane of the placenta. Our Grafix products are flexible and conforming wound covers designed for direct application to hard-to-treat acute and chronic wounds, including but not limited to diabetic foot ulcers (“DFUs”), venous leg ulcers (“VLUs”), and burns.

 

Stravix is a viable cryopreserved human placental tissue, comprised of amniotic and connective layers of umbilical tissue that has been developed as a wound cover or surgical wrap to support soft tissue repair. It retains native components of the umbilical tissue including the extracellular matrix, growth factors and endogenous viable cells including epithelial cells, fibroblasts and mesenchymal stem cells (“MSCs”). Stravix conforms to the site of injury and requires minimal preparation prior to use. It is thicker and has a stronger tensile strength than our Grafix products. Stravix was launched in late 2015.

 

BIO4 is a viable bone matrix containing endogenous bone forming cells including MSCs, osteoprogenitor cells, osteoblasts, osteoinductive and angiogenic growth factors. It possesses all four characteristics involved in bone repair and regeneration: osteoconductive, osteoinductive, osteogenic, and angiogenic. BIO4 is an alternative to autograft (or a graft of tissue from one’s own body) which requires a procedure of harvesting a patient’s own bone and is associated with donor site morbidity. Originally branded as OvationOS and launched in 2014, BIO4 is marketed and distributed exclusively by a subsidiary of Stryker Corporation (“Stryker”) under the brand name BIO4 since 2015.

 

18



Table of Contents

 

Cartiform is a viable osteochondral allograft that contains extracellular matrix, chondrogenic factors and endogenous viable chondrocytes native to the cartilage tissue. The intact architecture of native cartilage is preserved in Cartiform. Cartiform is intended to treat osteochondral defects. Cartiform can fit to any surface contour. Cartiform was launched in 2012 and is exclusively available through Arthrex, Inc. (“Arthrex”).

 

Menvivo was developed for repair of the meniscus following partial meniscectomy. Menvivo is processed from donated human meniscus tissue and maintains the structural and mechanical properties of the tissue. Extracellular matrix, biological factors and endogenous viable cells of fresh meniscal tissue are retained in Menvivo. Although Menvivo is available to the market as a 361 HCT/P, we have no current plans to actively distribute this product because the proper use of this product requires the development of new implantation techniques and instruments.

 

TruSkin is a cryopreserved viable skin allograft designed to address unmet medical needs of chronic wounds, such as DFUs, VLUs, pressure ulcers, surgical wounds, and wounds with exposed bone, tendon, joint capsule and muscle. TruSkin retains the extracellular matrix, growth factors and endogenous living skin cells of native tissue, making it an alternative to fresh skin allograft. We introduced TruSkin in November 2015. Although TruSkin is available to the market as a 361 HCT/P, we are not actively distributing it because reimbursement for this product is limited.

 

Sales, Marketing and Distribution

 

Grafix and Stravix:  We currently sell Grafix and Stravix through the efforts of our internal direct sales and marketing departments, as well as through a small number of specialty distributors for certain target markets. We focus our marketing efforts for these products in four specific channels: hospital outpatient departments (“HOPDs”), inpatient surgical procedures, private physician offices, and Department of Veteran Affairs (“VA”) and Department of Defense (“DOD”) hospitals. For our VA and DOD customers, our products are distributed exclusively through resellers designated as Service-Disabled, Veteran-Owned Small Businesses (“SDVOSBs”). SDVOSBs are eligible for set-asides and other preferences in the federal contracting process. For the VA, SDVOSBs enter into Federal Supply Schedule or Strategic Acquisition Center contracts and for the DOD, SDVOSBs enter into Distribution and Pricing contracts.

 

BIO4:  In December 2014, we entered into an exclusive agreement with Howmedica Osteonics Corp., also referred to as Stryker Orthopaedics, a subsidiary of Stryker Corporation, for the marketing and distribution of BIO4. We are responsible for supply, manufacturing, inventory management, shipments to customers, continued research and product improvement activities. Stryker is responsible for the sales and marketing of BIO4 for use in all surgical applications, including spine, trauma, extremity, cranial, and foot and ankle surgery. We collaborate with Stryker on the design and conduct of clinical development programs.

 

The agreement with Stryker provides for an initial four-year exclusive term, which commenced on the date of Stryker’s initial commercial sale of BIO4 in February 2015. The term may be extended by Stryker for an additional exclusive period of four years or an additional non-exclusive period of two years. If Stryker extends the term on an exclusive basis, it has the option to further extend the term on an exclusive basis for two more years. We received an initial exclusivity fee of $5.0 million in 2015 and are entitled to receive additional fees upon any exercise by Stryker of its right to extend the initial term, whether on an exclusive or non-exclusive basis. These additional fees are reduced on a sliding scale if Stryker meets certain revenue thresholds during the initial term or if revenue goals are not met as a result of us not fulfilling our supply obligations. Stryker is entitled to a certain percentage of sales of allograft services for BIO4 and has limited early termination rights.

 

Cartiform:  In October 2014, we entered into an exclusive agreement for our cartilage product, Cartiform, with Arthrex. The agreement with Arthrex provides Arthrex with exclusive commercial distribution rights to Cartiform. We are responsible for manufacturing, continued research and product improvement activities. We collaborate with Arthrex on the design and conduct of clinical development programs. The agreement provides for an initial eight-year exclusive term with automatic renewals of additional two-year periods. Pursuant to the agreement, Arthrex is entitled to a certain commission on Cartiform sales.

 

19



Table of Contents

 

Results of Operations

 

Revenues

 

The following table shows net sales by product line for the three months ended March 31, 2018 and 2017, respectively:

 

 

 

Three months ended March 31,

 

 

 

 

 

(in $000’s)

 

2018

 

2017

 

Change ($)

 

Change (%)

 

Grafix/Stravix

 

$

22,621

 

$

19,437

 

$

3,184

 

16.4

%

BIO4

 

6,796

 

5,367

 

1,429

 

26.6

%

Cartiform

 

2,216

 

2,144

 

72

 

3.4

%

Other

 

1

 

33

 

(32

)

-97.0

%

Total

 

$

31,634

 

26,981

 

$

4,653

 

17.2

%

 

Revenue was $31.6 million for three months ended March 31, 2018 which increased $4.7 million or 17.2%, compared with revenue of $27.0 million for the three months ended March 31, 2017. The increase in revenue was due to the following:

 

·                  Grafix/Stravix revenue increased $3.2 million, or 16.4%, primarily due to increased demand from market awareness and acceptance as we increased selling efforts.  Pricing of our Grafix/Stravix products did not significantly impact sales growth on a year-over-year basis during the three-month period ended March 31, 2018.

 

·                  BIO4 revenue increased $1.4 million, or 26.6%, primarily due to increased demand from market presence through our distribution arrangement with Stryker.  Pricing of our BIO4 products did not significantly impact sales growth on a year-over-year basis during the three-month period ended March 31, 2018.

 

·                  Cartiform revenue increased $72 thousand, or 3.4%, primarily due to increased demand from market presence through our distribution arrangement with Arthrex. Pricing of our Cartiform products did not significantly impact sales growth on a year-over-year basis during the three-month period ended March 31, 2018.

 

Gross Profit

 

Gross profit was $22.8 million for three months ended March 31, 2018, which increased $3.6 million or 18.8%, compared with gross profit of $19.2 million for the three months ended March 31, 2017.  This increase was due to higher sales.  Our gross profit margin remained relatively consistent between the periods at 72% for the three months ended March 31, 2018 and 71% for the three months ended March 31, 2017.

 

Research and Development Expenses

 

Research and development expenses totaled $1.5 million, or 4.9% of revenue, for three months ended March 31, 2018 compared with $1.2 million, or 4.5% of revenue, for the three months ended March 31, 2017.  This increase was due to higher costs associated with the development and testing of our lyopreservation technology which will allow for ambient storage of viable tissues.

 

Sales and Marketing Expenses

 

Sales and marketing expense totaled $16.3 million, or 51.5% of revenue, for three months ended March 31, 2018 compared with $14.7 million, or 54.6% of revenue, for the three months ended March 31, 2017. This increase of $1.6 million was primarily due to higher labor and labor related costs, including commissions due to higher sales.

 

20



Table of Contents

 

General and Administrative Expenses

 

General and administrative expenses totaled $7.4 million, or 23.5 % of revenue, for three months ended March 31, 2018 compared with $4.9 million, or 18.0% of revenue, for the three months ended March 31, 2017.  This increase of $2.5 million was primarily due to higher accounting and legal fees of $2.0 million and higher labor and labor related costs of $0.8 million.

 

Other Income, Net

 

Other income, net, for the three months ended March 31, 2018, was $216 thousand, an increase of $180 thousand compared to other income, net, of $36 thousand for the three months ended March 31, 2017. This increase was due to realized losses on our investments in the 2017 period.

 

Income Taxes

 

Income tax expense for three months ended March 31, 2018 was $36 thousand, which was comparable to the three month period ended March 31, 2017 of $32 thousand.

 

Because realization of deferred tax assets is dependent upon future earnings, a full valuation allowance has been recorded on the net deferred tax assets as of March 31, 2018 and December 31, 2017, which relate primarily to accounts receivable reserves, various accrued expenses and business tax credit carryforwards.  In the event that we become profitable, we have general business credits (before a 100% valuation allowance) that may be utilized to reduce our federal tax liability.

 

Liquidity and Capital Resources

 

Liquidity

 

At March 31, 2018, we had $3.4 million in cash and cash equivalents and $24.5 million in investments.  We have not had any outstanding debt at any time since fiscal 2008. In connection with the securities class action lawsuit, we agreed in principle to a total payment of $18.5 million.  We expect to recover $4.8 million from unused insurance. The remaining balance of $13.7 million will be paid from our cash and investments. Even after taking into consideration these costs, we anticipate our cash on hand, investments and cash flows from operations will be sufficient to finance our operations for at least the next twelve months.

 

Cash Flow

 

Net cash provided by operating activities during the three months ended March 31, 2018 was $337 thousand and was primarily due to our net loss of $2.3 million offset by net increase of $2.9 million in accounts payable, accrued expenses and other liabilities, primarily due to higher professional fees resulting from completion of the restatement.

 

Net cash provided by investing activities during the three months ended March 31, 2018 was $55 thousand and primarily reflect the $45 thousand in net proceeds from sale of our investments available for sale offset by the $100 thousand in purchases of property and equipment made during the year.

 

There was no net cash provided by financing activities for the three months ended March 31, 2018.

 

21



Table of Contents

 

Capital Resources

 

We expect our operating capital needs to continue to increase for the remainder of 2018 as we incur costs to advance the commercialization of our products and fund our product development activities.  We are subject to the risks associated with the development of new products and may encounter unforeseen expenses, difficulties, complications, delays or other unknown factors that may adversely affect our business and require additional capital.

 

Our future capital requirements will depend on many factors, including:

 

·                  revenues generated by sales of our products;

 

·                  the costs associated with expanding our sales and marketing efforts;

 

·                  the costs associated with the resolution of legal proceedings related to the restatement;

 

·                  the expenses we incur in manufacturing and managing the supply chain for our products;

 

·                  the costs of developing and commercializing new products or technologies

 

·                  the cost of maintaining current products as 361 HCT/Ps or obtaining regulatory approval through the BLA regulatory pathway if any of our products lose their 361 HCT/P status

 

·                  the number and timing of any acquisitions and other strategic transactions;

 

·                  the costs associated with capital expenditures; and

 

·                  unanticipated general and administrative expenses.

 

We have not had any outstanding debt at any time since 2008. We believe that our cash on hand, investments, and cash flows from operations will be adequate to meet the capital expenditures and working capital requirements of our operations for at least the next twelve months.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet financing arrangements as of March 31, 2018 and we have not entered into any transactions involving unconsolidated subsidiaries or special purpose entities.

 

Item 3.   Quantitative and Qualitative Disclosures about Market Risk.

 

We are exposed to market risks from changes in interest rates through our investments, which consist primarily of corporate and government bonds. Due to the short duration of our investment portfolio and the high quality of our investments, an immediate 10% change in interest rates would not have a material effect on the value of our portfolio. Therefore, we would not expect our operating results or cash flows to be affected to any material degree by the effect of a sudden change in market interest rates on our securities portfolio.

 

We do not currently have any material foreign currency exposure.

 

22



Table of Contents

 

Item 4.         Controls and Procedures.

 

Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended (“the Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our Interim Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.

 

Our management, under the supervision and with the participation of our Interim Chief Executive Officer and Interim Chief Financial Officer, has carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this report. As described in Management’s Annual Report on Internal Control over Financial Reporting in Item 9A of the Annual Report, we previously reported material weaknesses in internal control over financial reporting that existed as of December 31, 2017. These material weaknesses in our internal control over financial reporting were not remediated as of March 31, 2018.  As a result, our Interim Chief Executive Officer and Interim Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of March 31, 2018.

 

Notwithstanding the material weaknesses, our management has concluded that the financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows in conformity with GAAP.

 

Changes in Internal Control over Financial Reporting

 

With the exception of the remediation efforts described in Part II, Item 9A, “Controls and Procedures” of our Annual Report, there have not been any changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

23



Table of Contents

 

PART II - OTHER INFORMATION

 

Item 1.          Legal Proceedings.

 

From time to time, we are subject to claims, asserted or unasserted, or named as a party to lawsuits, arbitrations or investigations. Litigation, in general, and intellectual property and securities litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of legal proceedings cannot be predicted any certainty and in the case of the complex legal proceedings, such as intellectual property and securities litigation, the results are difficult to predict.  Except as described in Note 10, “Commitments and Contingencies,” to the unaudited condensed consolidated financial statement included in Part I, Item 1 of this Quarterly Report on Form 10-Q, we are not aware of any asserted or unasserted legal proceedings or claims that we believe would have a material adverse effect on our business, financial condition or results of operations.

 

Item 1A. Risk Factors.

 

There have not been any material changes in the risk factors previously disclosed under the heading “Risk Factors” in Part I — Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 as filed with the SEC on March 28, 2018.

 

Item 2.          Unregistered Sales of Equity Securities and Use of Proceeds.

 

We granted stock options to Linda Chang, our former Chief Financial Officer, to purchase 20,000 shares at the exercise price of $8.92 on February 26, 2018 and 10,000 shares at the exercise price of $8.95 on March 6, 2018. On the date of said Ms. Chang’s departure from the Company, May 9, 2018, no options were vested and the grants were forfeited.

 

We granted stock options to an employee, to purchase 20,000 shares at the exercise price of $8.95 on March 6, 2018. On the date of said employee’s departure from the Company, March 22, 2018, no options were vested and the grant was forfeited.

 

We granted stock options to another employee to purchase 20,000 shares at the exercise price of $7.09 on February 6, 2018. The options vest in equal installments on the first, second, third and fourth anniversary of the award date.

 

Item 3.          Defaults Upon Senior Securities.

 

None.

 

Item 4.          Mine Safety Disclosures.

 

None.

 

Item 5.          Other Information.

 

None.

 

24



Table of Contents

 

Item 6.          Exhibits.

 

Exhibit
Number

 

Description of Exhibit

 

 

 

3.1

 

Articles of Restatement of the Registrant as filed with the State Department of Assessments and Taxation of Maryland on June 4, 2010 (Incorporated herein by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q filed by the Registrant with the SEC on August 6, 2010).

 

 

 

3.2

 

Articles of Amendment of the Registrant as filed with the State Department of Assessments and Taxation of Maryland on June 10, 2015 (Incorporated herein by reference to Exhibit 3.2 to the Annual Report on Form 10-K filed by the Registrant with the SEC on March 28, 2018).

 

 

 

3.3

 

Articles of Merger between Osiris Therapeutics, Inc., a Delaware corporation, and Osiris Maryland, Inc., a Maryland corporation, as survivor, changing the name of “Osiris Maryland, Inc.” to “Osiris Therapeutics, Inc.” as filed with the State Department of Assessments and Taxation of Maryland on May 27, 2010, and effective May 31, 2010 (Incorporated herein by reference to Exhibit 3.2 to the Current Report on Form 8-K filed by the Registrant with the SEC on June 2, 2010).

 

 

 

3.4

 

Bylaws of the Registrant (Incorporated herein by reference to Exhibit 3.3 to the Current Report on Form 8-K filed by the Registrant with the SEC on June 2, 2010).

 

 

 

31.1*

 

Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2*

 

Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1*

 

Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101

 

The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, formatted in Extensible Business Reporting Language (XBRL), include: (i) the Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss), (ii) the Unaudited Condensed Consolidated Balance Sheets, (iii) the Unaudited Condensed Consolidated Statements of Cash Flows, and (iv) related notes.

 


* Filed herewith.

 

25



Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

Osiris Therapeutics, Inc.

 

 

Date: May 10, 2018

/s/ JASON KEEFER

 

Jason Keefer

 

Interim Chief Executive Officer

 

 

Date: May 10, 2018

/s/ JOEL ROGERS

 

Joel Rogers

 

Interim Chief Financial Officer

 

26


Exhibit 31.1

 

CERTIFICATION

 

I, Jason Keefer, certify that:

 

1.                   I have reviewed this quarterly report on Form 10-Q of Osiris Therapeutics, Inc.;

 

2.                   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.                   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.                   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) for the registrant and have:

 

(a)              Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)              Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)               Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)              Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.                   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)              All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)              Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 10, 2018

 

 

 

 

/s/ JASON KEEFER

 

Jason Keefer

 

Interim Chief Executive Officer

 

1


Exhibit 31.2

 

CERTIFICATION

 

I, Joel Rogers, certify that:

 

1.                   I have reviewed this quarterly report on Form 10-Q of Osiris Therapeutics, Inc.;

 

2.                   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.                   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.                   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) for the registrant and have:

 

(a)              Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)              Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)               Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)              Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.                   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)              All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)              Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 10, 2018

 

 

 

 

/s/ JOEL ROGERS

 

Joel Rogers

 

Interim Chief Financial Officer

 

1


[Exhibit 32.1

 

CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

As ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Jason Keefer, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of Osiris Therapeutics, Inc., for the quarterly period ended March 31, 2018, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Osiris Therapeutics, Inc.

 

Dated: May 10, 2018

By

/s/ JASON KEEFER

 

 

Jason Keefer

 

 

Interim Chief Executive Officer

 

I, Joel Rogers, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of Osiris Therapeutics, Inc., for the quarterly period ended March 31, 2018, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of Osiris Therapeutics, Inc.

 

Dated: May 10, 2018

By

/s/ JOEL ROGERS

 

 

Joel Rogers

 

 

Interim Chief Financial Officer

 

A signed original of this written statement required by Section 906 has been provided to Osiris Therapeutics, Inc. and will be retained by Osiris Therapeutics, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

 

1