Osiris Therapeutics, Inc.
OSIRIS THERAPEUTICS, INC. (Form: 10-K/A, Received: 03/27/2017 16:37:52)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K/A

 

Amendment No. 1

 

x        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934:

 

For the fiscal year ended December 31, 2014

 

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
(State or other jurisdiction of
incorporation or organization)

 

71-0881115
(I.R.S. Employer
Identification No.)

 

 

 

7015 Albert Einstein Drive, Columbia, Maryland
(Address of principal executive offices)

 

21046-1707
(Zip Code)

 

443-545-1800

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on with Registered

Common Stock, $0.001 par value

 

NASDAQ Global Market

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  o   No  x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  o   No  x

 

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  o   No  x

 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  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” and “smaller reporting 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

 

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

 

On June 30, 2014, the aggregate market value of voting Common Stock held by non-affiliates of the registrant, based upon the last sale price of the Common Stock reported on the NASDAQ Global Market was approximately $303,915,919.

 

The number of shares of the registrant’s Common Stock outstanding as of March 6, 2017 is 34,525,886.

 

Documents Incorporated by Reference:

 

Certain sections of the Registrant’s definitive proxy statement filed with the Commission on April 30, 2015 in connection with the 2015 Annual Meeting of Stockholders were incorporated by reference into Part III of the Form 10-K originally filed with the Commission on March 20, 2015.

 

 

 



Table of Contents

 

EXPLANATORY NOTE

 

Osiris Therapeutics, Inc. (the “Company”) is filing this amendment (this “Amendment” or “Form 10-K/A”) to its Annual Report on Form 10-K for the year ended December 31, 2014, which was originally filed on March 20, 2015 (the “Original Form 10-K” or the “Original Filing”).  This Amendment includes restated financial statements for the year ended December 31, 2014.  This Amendment also includes restated 2014 interim financial statements in Note 16 (Quarterly Financial Data (Unaudited)) to the financial statements in Part II, Item 8 of this Form 10-K/A.

 

The corrections contained in these restated financial statements, which we refer to herein as the “Restatement,” were prepared following an independent review by the Audit Committee (the “Audit Committee”) of the Company’s Board of Directors into certain accounting matters, which is further described herein.

 

Background

 

As previously described in the Company’s Current Report on Form 8-K filed on March 15, 2016, the Audit Committee, in consultation with management, concluded that the Company’s unaudited interim and audited annual financial statements previously issued for 2014 and its unaudited interim financial statements previously issued for the three and nine months ended September 30, 2015 should not be relied upon due to errors identified in such financial statements related to the timing of revenue recognition under contracts with distributors.  In the Company’s Current Report on Form 8-K filed on November 20, 2015, the Company previously disclosed its conclusion that its unaudited interim financial statements for the quarters ended March 31, 2015 and June 30, 2015 should not be relied upon for similar reasons.

 

The previously issued financial statements that should not be relied upon were included in the Company’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2014, June 30, 2014 and September 30, 2014, the Original Form 10-K and its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2015, June 30, 2015 and September 30, 2015 (the “Non-Reliance Periods”).

 

As previously described in the Company’s Current Report on Form 8-K filed on December 17, 2015, the Company’s independent registered public accounting firm BDO USA, LLP (“BDO”) resigned and the Company has selected Ernst & Young LLP as its independent registered public accounting firm for the fiscal year ended December 31, 2015, subject to completion of its standard client acceptance procedures, which are still ongoing. Notwithstanding the resignation, BDO has continued to work with the Company to complete its audit of the financial statements contained in Part II, Item 8 of this Form 10-K/A.

 

At the request of BDO, the Audit Committee commenced an independent review into these matters with the assistance of outside professionals engaged by the Audit Committee (the “Independent Review”).

 

The scope of the Independent Review, which was determined by the Audit Committee after discussion with BDO and outside professionals engaged by the Audit Committee, focused primarily on revenue recognition related to distributor sales arrangements. In conjunction with the Independent Review, the Audit Committee reviewed these matters and determined that errors and irregularities existed in the Company’s previously issued financial statements with respect to the Non-Reliance Periods, which as to the 2014 financial statements are described in more detail below. The Audit Committee also determined, in consultation with management, that certain material weaknesses in internal control over financial reporting existed at December 31, 2014. These material weaknesses are described below under “—Controls and Procedures” and in Part II, Item 9A of this Form 10-K/A. In reaching these conclusions, the Audit Committee considered information derived from the Independent Review, as well as procedures and other work performed by management.

 

The Audit Committee determined that errors and irregularities in the Company’s previous accounting in 2014 occurred on the basis of, among other things:

 

1.               with respect to sales transactions with two distributors that were affiliated with each other, the existence of extra-contractual or undocumented terms or arrangements initiated by former executives of the Company at the onset of the transactions and concessions agreed to by former executives of the Company subsequent to the initial transaction, such as unusually long payment terms. The existence of unusually long payment terms caused the related sales transactions to fail the “fixed and determinable” criteria required under generally accepted accounting principles in the United States (“GAAP”) to recognize revenue; and

 

2



Table of Contents

 

2.               for one sales transaction to a third distributor previously recorded in the fourth quarter of 2014, the existence of evidence indicating the former chief financial officer of the Company created a document subsequent to filing of the Original Form 10-K. The evidence suggests that an arrangement with the distributor did not exist in 2014 so that the criteria required under GAAP to recognize revenue for this transaction in 2014 was not met.

 

In the Restatement, the Company will reverse revenue previously recorded in 2014 for these sales transactions with the three distributors and will thereafter recognize revenue from these transactions under the cash, rather than accrual, basis of accounting, which means that revenue arising from these transactions will be recognized in subsequent periods upon receipt of payment from the customer.

 

The Company assessed the information derived from the Independent Review in making determinations with respect to accounting adjustments reflected in the restated financial statements contained in this Form 10-K/A, and such determinations are consistent with the findings of the Independent Review. Certain other adjustments identified by management, including correction of errors in the valuation of inventory, accounting for consigned inventory quantities, determination of bad debt reserve and the classification of costs and expenses, were made to the financial statements in connection with the Restatement. These adjustments are described below under “—Description of the Restatement.”

 

The Audit Committee, at the request of management and as part of the Independent Review, also evaluated certain issues related to director expense reimbursements.  On the basis of that review, the Audit Committee determined that certain requests for reimbursement submitted between 2012 and 2015 by the Company’s Chairman of the Board to the Company’s former chief financial officer should not have been paid to him.  In December 2016, the Chairman returned to the Company the full amount that the Audit Committee determined should not have been paid to him.  See Note 10 (Related Party Transactions and Warrant) to the Company’s financial statements in Part II, Item 8 of this Form 10-K/A for further details.

 

Description of the Restatement

 

The primary errors corrected by the Restatement include the errors determined in the Independent Review and management’s internal review, and are as follows:

 

Recognition of revenue under distributor sales arrangements .  Based on the Independent Review, the Company determined that it had erred in its application of GAAP with respect to the recognition of revenue arising from certain distributor sales arrangements as described below:

 

1.               Certain distributor sales did not meet the criteria for recognizing revenue in 2014 .  During 2014, the Company provided unusually long payment terms to two distributors that were affiliated with each other.  Granting a customer unusually long payment terms can cause the related sales transactions to fail the “fixed and determinable” criteria required under GAAP to recognize revenue. Also, for one sales transaction to a third distributor in the fourth quarter of 2014, the Company determined that evidence existed which suggests that an arrangement under GAAP did not exist in 2014.  Accordingly, revenue arising from these transactions did not meet the criteria for recognizing revenue under GAAP in 2014.  Correction of these errors decreased 2014 revenue by $10.3 million and decreased trade accounts receivable as of December 31, 2014 by a like amount.  Net of product costs and sales commission expenses arising from these transactions, correction of these errors decreased 2014 net income by $5.6 million. Under GAAP, the $10.3 million revenue reversed in 2014 may be recognized in a future period on an accrual basis upon meeting the criteria for revenue recognition or, if such criteria is not met, on a cash basis, upon receipt of payment from the customer.

 

2.               Sales through government contracting agent.   The Company utilizes a government contracting agent through which it sells to facilities of the United States Department of Veterans Affairs and the United States Department of Defense under the agent’s GSA Federal Supply Schedule. The Company erred in reporting revenue from such sales net of the agent’s fees, although GAAP (and the Company’s policy) requires that revenue arising from contractual arrangements of this type be reported at the gross price paid by the end user, and that the related fees be reported as a sales expense. Correction of this error, with respect to these sales, increased both 2014 sales and marketing expenses and product revenue by $1.5 million and, accordingly, had no impact on net income.

 

Taken together, correction of the errors arising from these two types of distributor sales arrangements decreased 2014 product revenue by $8.8 million (consisting of a $10.3 million decrease described in paragraph (1) above offset by a $1.5 million increase described in paragraph (2) above).  In addition, the Company corrected other revenue accounting errors unrelated to distributor sales arrangements which decreased 2014 product revenue by an additional $241,000.  As a result, the correction of errors in the Restatement decreased 2014 product revenue by a total of $9.0 million.

 

Consistent with corrections in the Company’s recognition revenue, the product costs arising from the distributor sales transactions for which revenue has been reversed have also been reversed and added back to inventory.  As a result of such corrections, inventory as of December 31, 2014 increased by $852,000 and the cost of product revenue for the year then

 

3



Table of Contents

 

ended decreased by the same amount.  Similarly, sales commission expenses incurred during 2014 in connection with the distributor sales transactions for which revenue has been reversed have also been reversed. As a result of such corrections, prepaid expenses increased by $2.2 million, with respect to such expenses paid during 2014, and accrued expenses decreased by $1.5 million, with respect to commissions unpaid and accrued as of December 31, 2014, while 2014 sales and marketing expenses decreased by $3.8 million.

 

Valuation of inventory and accounting for consigned inventory quantities .  Management determined that there were errors in the valuation of the Company’s finished goods inventory resulting from computational errors, failure to update and apply current cost information in the calculation of unit costs, and non-timely identification and write-off of products that were no longer salable as determined by the Company’s quality assurance procedures.  In addition, management determined the need to establish a reserve for consigned finished goods inventory as the Company had not adequately monitored the ultimate disposition of consigned goods whereby some were returned, or scrapped, or used by the consignee.  Lastly, management determined the need to establish a reserve for work-in-process inventory which largely consists of product in quarantine pending the outcome of the Company’s quality assurance procedures.  This process results in a reasonably consistent identification of product that is unsalable. Correction of these errors, to write-down the value of inventory as of December 31, 2014, increased 2014 cost of product revenue and decreased 2014 net income by $2.0 million.

 

Bad debt reserve .  Management determined that it did not correctly assess the collectability of accounts receivable and determined an appropriate allowance for doubtful accounts as of December 31, 2014.   Correction of this error, by increasing its 2014 bad debt expenses and allowance for doubtful accounts as of December 31, 2014, increased the Company’s 2014 general and administrative expenses by $450,000 and reduced its accounts receivables as of December 31, 2014 by the same amount.

 

Classification of costs and expenses to income statement captions .   Management determined that errors had been made in classification of costs and expenses to income statement captions. Correction of these errors reduced 2014 cost of product revenue and research and development expenses by $4.1 million and $3.6 million, respectively, and increased sales and marketing and general and administrative expenses by $7.6 million and $134,000, respectively.

 

Other adjustments.    In addition to the errors mentioned above, adjustments were made to the 2014 financial statements for various other errors identified by management and the Audit Committee during the course of the restatement process. The net impact of such adjustments was to decrease net income by $507,000 for the year ended December 31, 2014. See Note 2 (Restatement of the Financial Statements) to the Company’s financial statements included in Part II, Item 8 of this Form 10-K/A for further details.

 

Tax effect of Restatement adjustments. The Company reduced 2014 income tax expense by $585,000 to account for the impact of the adjustments in the Restatement described above.

 

In the aggregate, the Restatement decreased revenue and net income for 2014 by $9.0 million and $8.2 million, respectively. The revenue decrease arises from a $10.3 million reversal of revenue resulting from the Company’s failure to meet criteria for recognizing revenue under GAAP, offset by a $1.5 million increase in revenue required to recognize the gross end-user sales value of the product sold through the Company’s government contracting agent. GAAP requires the recognition of revenue when the customer payment is received if unusually long payment terms are offered. Customer payments aggregating $8.1 million and $1.2 million were received in 2015 and 2016, respectively, on distributor sales transactions for which revenue was reversed in 2014, which will be recognized as revenue in the year payment was received. In addition, the Company corrected other revenue accounting errors unrelated to distributor sales arrangements which decreased 2014 product revenue by $241,000. See Note 2 (Restatement of the Financial Statements) to the Company’s financial statements included in Part II, Item 8 of this Form 10-K/A for further details.

 

Revision of Prior Period Financial Statements

 

In addition to the correction of the errors in 2014 in the Restatement, the Company also voluntarily corrected certain immaterial errors in its financial statements for the years ended December 31, 2013, 2012 and 2011 contained herein.  The adjustments to correct immaterial errors only had an impact on certain captions within the Company’s statements of comprehensive (loss) income and balance sheets as set forth below.

 

4



Table of Contents

 

 

 

For year ended December 31,

 

 

 

2013

 

2012

 

2011

 

(in thousands)

 

Net Income
Impact

 

Stockholders’
Equity Impact

 

Net Income
Impact

 

Stockholders’
Equity Impact

 

Net Income
Impact

 

Stockholders’
Equity Impact

 

Revenue Recognition

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenue

 

$

1,390

 

$

 

$

(685

)

$

 

$

(262

)

$

 

Cost of product revenue

 

(195

)

 

131

 

 

64

 

 

Sales and marketing expenses

 

(443

)

 

 

 

 

 

Deferred revenue

 

 

947

 

 

(685

)

 

(262

)

Inventory

 

 

(195

)

 

131

 

 

64

 

Directors’ Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Other receivables

 

 

70

 

 

34

 

 

 

Fees paid to related parties

 

70

 

 

34

 

 

 

 

Tax Effect of the Adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes benefit

 

(332

)

 

 

 

 

 

Income from discontinued operations

 

332

 

 

 

 

 

 

Net increase/(decrease)

 

$

822

 

$

822

 

$

(520

)

$

(520

)

$

(198

)

$

(198

)

 

See “Revision of Prior Period Financial Restatements” in Note 2 (Restatement of the Financial Statements) to the Company’s financial statements included in Part II, Item 8 of this Form 10-K/A for further details on these adjustments to periods prior to 2014.  See also Note 10 (Related Party Transactions and Warrant) to the Company’s financial statements for more details on the director’s expenses adjustment.

 

Controls and Procedures

 

As previously disclosed in the Company’s Currrent Report Form 8-K filed on November 20, 2015 and the Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, the Company identified a control deficiency related to revenue recognition under distributor sales arrangements that constituted a material weakness in its internal control over financial reporting.  Management also identified other material weaknesses in its internal control over financial reporting as of December 31, 2014, which were not previously disclosed. As a result of the material weaknesses, management has concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2014.  The Company has implemented and continues to implement measures to remediate these material weaknesses.  See Part II, Item 9A, “Controls and Procedures” of this Form 10-K/A for more information about the material weaknesses and our remediation activities.

 

Items Amended by this Form 10-K/A

 

Revisions to the Original Filing have been made to the following items to reflect the Restatement and related matters (including legal proceedings and government investigations), the Company’s late filings with the Securities and Exchange Commission (“SEC”) and the consequences therefrom, including delisting of our common stock from trading on Nasdaq, and to correct other immaterial errors:

 

·       Part I, Item 1A, Risk Factors

 

·       Part I, Item 3, Legal Proceedings

 

·       Part II, Item 6, Selected Financial Data

 

·       Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

·       Part II, Item 8, Financial Statements and Supplementary Data

 

·       Part II, Item 9A, Controls and Procedures

 

·       Part IV, Item 15, Exhibits and Financial Statement Schedules

 

This Form 10-K/A also amends the Original Filing to restate management’s report on internal control over financial reporting and its conclusion on disclosure controls and procedures to address the material weaknesses in internal control over financial reporting.  This Form 10-K/A also amends the Original Filing to provide an amended opinion of BDO on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014.

 

Subsequent to filing of the Original Form 10-K, the former chief executive officer and former chief financial officer left the Company.  In accordance with applicable SEC rules, this Form 10-K/A includes certifications from our current chief executive officer and current chief financial officer dated as of the date of this filing.

 

5



Table of Contents

 

The errors corrected by the Restatement are further discussed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in Note 2 (Restatement of the Financial Statements ) to the Company’s financial statements included in Part II, Item 8 of this Form 10-K/A.

 

Other than this Form 10-K/A, we do not intend to file any other amended reports in connection with the restatement of the annual and interim 2014 financial statements. All of our future Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q will reflect the restated information included in this Form 10-K/A. We expect to file a Form 10-K for the year ended December 31, 2015 as soon as practicable after the date hereof, which is expected to include restated financial statements for the interim periods in 2015.

 

Other than with respect to matters related to the Restatement and related matters (including legal proceedings, government investigations and subsequent events), the Company’s late filings with the SEC and the consequences therefrom and to correct other immaterial errors, this Amendment generally does not reflect events that have occurred after March 20, 2015, the filing date of the Original Form 10-K, or modify or update the disclosures presented in the Original Form 10-K, except to reflect the effects of such matters. Accordingly, this Amendment should be read in conjunction with the Company’s Current Reports on Form 8-K filed with the SEC since March 20, 2015 and with respect to all of the Company’s filings after the date hereof, including the Company’s Form 10-K for 2015 which will be filed as soon as practicable after the date hereof.

 

6



Table of Contents

 

OSIRIS THERAPEUTICS, INC.

Annual Report on Form 10-K/A

Fiscal Year Ended December 31, 2014

 

INDEX

 

 

 

Page

PART I

 

Item 1A.

Risk Factors

9

Item 3.

Legal Proceedings

31

 

 

 

PART II

 

Item 6.

Selected Financial Data

33

Item 7.

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

34

Item 8.

Financial Statements and Supplementary Data

50

Item 9A.

Controls and Procedures

101

 

 

PART IV

 

Item 15.

Exhibits, Financial Statement Schedules

105

 

7



Table of Contents

 

CAUTIONARY STATEMENTS ABOUT FORWARD-LOOKING INFORMATION

 

This Form 10-K/A includes “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements included or incorporated herein which are not historical facts are forward looking statements. When used in this Form 10-K/A, 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 Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 1A “Risk Factors,” 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 Audit Committee’s Independent Review, the Company’s related ongoing work, and the Restatement and related legal proceedings; the Company’s ability to recognize revenue reversed in 2014 in subsequent periods; our previous and current non-compliance with certain Nasdaq Stock Market LLC (“Nasdaq”) listing rules, and related pending proceedings in connection therewith; the outcome of pending legal proceedings and government investigations; our product development efforts; our clinical trials and anticipated regulatory requirements, and our ability to successfully navigate these requirements; the success of our product candidates in development; status of the regulatory process for our products and product candidates; implementation of our corporate strategy; our financial performance; our product research and development (“R&D”)  activities and projected expenditures, including our anticipated timeline and commercialization strategy for our marketed products (including Grafix®, BIO 4™ and Cartiform®) and 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 collaborating partners; our ability to maintain and benefit from our collaborative arrangements; our costs to comply with governmental regulations; our plans for or success of sales and marketing; our plans regarding facilities; 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.

 

Readers are cautioned that all forward-looking statements are made only as of March 20, 2015, the date on which the Original Form 10-K was filed, unless it is specifically otherwise stated to be made as of a different date, or refers to matters related to the Restatement (including consequences of the Company’s delay in filing its Annual Report on Form 10-K for the year ended December 31, 2015 and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2016, June 30, 2016 and September 30, 2016) and are expressly qualified in their entirety by the cautionary statements included herein. 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.

 

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

 

8



Table of Contents

 

PART I

 

ITEM 1A.  Risk Factors.

 

We are subject to numerous risks and uncertainties in the course of our business. In addition to the other information contained in this report and the exhibits hereto, you should carefully consider the risks and uncertainties described below as. These risks are not the only ones that we may face. Additional risks not presently known to us or that we currently consider immaterial may also impair our business operations. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks faced by us described below or elsewhere in this report.

 

Risks Related To Our Business

 

We have a history of operating losses and may not achieve or sustain profitability.

 

Until fiscal 2009, we incurred losses in each year since our inception, and may incur additional losses in the future. As of December 31, 2014, we had an accumulated deficit of $211.6 million. These losses resulted principally from costs incurred in our R&D programs and from our general and administrative expenses. These losses, among other things, have had and will continue to have an adverse effect on our stockholders’ equity, total assets and working capital.

 

We expect to continue to incur significant operating expenses in the foreseeable future as we seek to:

 

·                   complete our confirmatory Phase III quality random clinical trial with Grafix® for complex diabetic foot wounds with exposed tendon or bone;

 

·                   continue other studies and initiate and pursue additional studies and possible clinical trials for our Biosurgery products, including Grafix® for venous leg ulcers, which we have begun, and possibly other potential indications;

 

·                   manage regulatory issues and requirements related to the marketing and distribution of our products and product candidates, including issues related to U.S. Food and Drug Administration (“FDA”) approval and third-party payor reimbursement;

 

·                   maintain, expand and protect our intellectual property; and

 

·                   continue to add sales, operational, financial, accounting, facilities engineering and information systems personnel, consistent with expanding our operations.

 

The extent of our future operating losses or profits is highly uncertain, and we may not achieve or sustain profitability. If we are unable to achieve and then maintain profitability, the market value of our common stock will decline and you could lose part or all of your investment.

 

The current credit and financial market conditions may exacerbate certain risks affecting our business.

 

We rely upon third parties for certain aspects of our business, including collaboration partners, wholesale distributors, contract clinical trial providers, contract manufacturers and third-party suppliers. Because of the tightened global credit and continuing volatility in the financial markets, there may be a delay or disruption in the performance or satisfaction of commitments to us by these third parties, which could adversely affect our business.

 

We depend on key personnel.

 

Our future success depends to a significant extent on the skills, experience and efforts of our scientific, management, and sales personnel.  None of our employees is employed for a specified term. Competition for personnel is intense. We may be unable to retain our current personnel or attract or integrate other qualified management and scientific personnel in the future which could harm our business and might significantly delay or prevent the achievement of research, development or business objectives.

 

9



Table of Contents

 

The potential of our Biosurgery products and products under development to treat conditions may not be realized.

 

We are continually evaluating the potential of our Biosurgery products and products under development. Our products are susceptible to various risks, including undesirable and unintended side effects, unintended immune system responses, inadequate efficacy or other characteristics that may prevent or limit their commercial use, or if required, marketing approval. If the treatment potential of our products is not realized, the value of our technology, our development programs and our products could be significantly reduced. Because our Biosurgery products are comprised of human tissue, any negative developments regarding the therapeutic potential or side effects of human tissue products could have a material adverse effect on our business, financial condition and results of operations.

 

Our product development programs are based on novel technologies and are inherently risky.

 

We are subject to the risks of failure inherent in the development of products based on new technologies. The novel nature of our products and product candidates creates significant challenges in regards to product development and optimization, processing and manufacturing, government regulation, third-party reimbursement and market acceptance. For example, questions persist with regard to the necessity of FDA approval for some cell-based products, and therefore, the pathway to commercialization of our Biosurgery products may be more complex and lengthy. Additionally, cell-based products are subject to donor-to-donor variability, which can make standardization more difficult. As a result, the development and commercialization pathway for our products may be subject to increased uncertainty, as compared to the pathway for conventional products.

 

Our Biosurgery products represent new classes of therapy that the marketplace may not understand or accept.

 

The market may not understand or accept our products. We are developing products that represent novel treatments or therapies and which will compete with a number of more conventional products and therapies manufactured and marketed by others, including major pharmaceutical companies. The novel nature of our Biosurgery products creates significant challenges in regards to product development and optimization, manufacturing, government regulation and third-party reimbursement. As a result, the development pathway for our Biosurgery products may be subject to increased scrutiny, as compared to the pathway for more conventional products.

 

The degree of market acceptance of any of our developed or potential products will depend on a number of factors, including:

 

·                   the clinical safety and effectiveness of our products and their perceived advantage over alternative treatment methods;

 

·                   our ability to convince health care providers that the use of our products in a particular procedure is more beneficial than the standard of care or other available methods;

 

·                   our ability to explain clearly and educate others on the use of human placental tissue, to avoid potential confusion with and differentiate ourselves from the ethical controversies associated with human fetal tissue;

 

·                   ethical controversies that may arise regarding the use of human tissue of any kind, including tissues derived from deceased donors, and distribution for profit of our deceased donor products;

 

·                   adverse reactions involving our Biosurgery products or the products or product candidates of others that are human tissue based;

 

·                   our ability to supply a sufficient amount of our product to meet regular and repeated demand in order to develop a core group of medical professionals familiar with and committed to the use of our products; and

 

·                   the cost of our products and the reimbursement policies of government and third-party payors.

 

If the health care community does not accept our potential products for any of the foregoing reasons, or for any other reason, it could affect our sales, which could have a material adverse effect on our business, financial condition and results of operations.

 

10



Table of Contents

 

The successful commercialization and distribution of our Biosurgery products will depend on obtaining reimbursement from third-party payors.

 

We distribute our Biosurgery products in the United States. We may expand our distribution to other countries in the future. In the United States and elsewhere, the market for any pharmaceutical or therapeutic product is affected by the availability of reimbursement from third-party payors, such as government health administration authorities, private health insurers, health maintenance organizations and pharmacy benefit management companies. Biosurgery products like Grafix®, Cartiform® and BIO 4™  may have higher costs or fees associated with them compared with more traditional products, due to the higher cost and complexity associated with their research, development and production, and the complexity associated with their distribution—which requires special handling, storage and shipment procedures and protocols. This, in turn, may make it more difficult for our customers to obtain adequate reimbursement from third-party payors for our products and the procedures in which they are used, particularly if we cannot demonstrate a favorable cost-benefit relationship. Third-party payors may also deny coverage if they determine that the product has not received appropriate clearances from the FDA or other government regulators or is experimental, unnecessary or inappropriate.

 

In the countries of Europe and in some other countries, the pricing of prescription and therapeutic products and services, and reimbursement, are subject to increased governmental control. In addition, many other countries require pre-marketing approval for human tissue-based products, or otherwise more extensively regulate human tissue-based products than does the United States.

 

Regardless of whether we are required to conduct a successful clinical trial in order to market a product in the United States or a foreign country, we may nevertheless be required to conduct one or more clinical trials, and to publish one or more peer reviewed journal articles supporting the product, before we are able to obtain third-party reimbursement. We may also be required to conduct additional clinical trials that compare the cost effectiveness of our products to other available therapies before third-party payors will provide reimbursement. Conducting clinical trials is expensive and will result in delays in wide scale commercialization and reimbursement. Publishing of peer reviewed journal articles may also be costly and result in delays. In addition, even if our products otherwise meet the requirements for reimbursement, pricing negotiations with third-party payors may take months and result in significant delay in obtaining approval for reimbursement.

 

Reimbursement policies also sometimes differ depending upon the setting in which the product is to be used. The use of our Biosurgery products in a hospital setting as part of a surgical or other more extensive procedure may have a reimbursement pathway that differs from a use in an outpatient setting for a more narrowly defined procedure. Thus, for example, the reimbursement pathway for Grafix®—which we expect to be used more often in an outpatient setting—may differ from that for BIO 4™ —which we expect to be used more often in an in-patient hospital setting as part of a surgical procedure.

 

These differences may limit or make reimbursement more difficult for some products as compared to others, and influence our product development and marketing efforts in ways that may ultimately prove to be detrimental to us or our business.  Payors’ reimbursement policies also are subject to change, and the policies in effect at the time a product is marketed may be different from the policies in place when a reimbursement strategy was developed.

 

Managing and reducing health care costs has been a general concern of federal and state governments in the United States and of foreign governments. Although we do not believe that any recently enacted or presently proposed U.S. legislation should impact our business specifically and negatively as compared to other health care product businesses generally, we might nevertheless be subject to future regulations or other cost-control initiatives that materially restrict the price we receive for our products. In addition, third-party payors are increasingly challenging the price and cost-effectiveness of medical products and services, and many limit reimbursement for newly approved health care products. In particular, third-party payors may limit the indications for which they will reimburse patients who use any products that we may develop, or they may not provide reimbursement for our products separately from the procedures in which they are used to encourage providers to select products based on cost-effectiveness. Cost-control initiatives could decrease the price for products that we may develop, which would result in lower product revenue to us.

 

We and our distributor sales representatives must comply with U.S. federal and state fraud and abuse laws, including anti-kickback and false claims laws and equivalent foreign rules.

 

We are exposed to the risk that our employees, independent contractors, principal investigators, consultants, vendors or third-party distributors may engage in fraudulent or other illegal activity. Misconduct by these parties could include, among other infractions or violations, intentional, reckless and/or negligent conduct or unauthorized activity that

 

11



Table of Contents

 

violates FDA regulations, manufacturing standards, federal and state healthcare fraud and abuse laws and regulations, laws that require the true, complete and accurate reporting of financial information or data, other commercial or regulatory laws or requirements and equivalent foreign rules. We have policies and procedures intended to prohibit and deter such conduct, including, a Code of Ethics for Interactions with Healthcare Professionals, a Code of Conduct, an Anticorruption Policy, and a Whistleblower Policy, but it is not always possible to identify and deter misconduct by our employees and other third parties, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations.

 

There are numerous U.S. federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback and false claims laws. Our relationships and our distributors’ relationships with physicians, other healthcare professionals and hospitals are subject to scrutiny under these laws.

 

Healthcare fraud and abuse laws and related regulations are complex, and even minor irregularities can potentially give rise to claims that a statute or prohibition has been violated. The laws that may affect our ability to operate include:

 

·                   the federal Anti-Kickback Statute, which prohibits, among other things, knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in cash or in kind, to induce or reward either the referral of an individual for, or the purchase, order or recommendation of, items or services for which payment may be made, in whole or in part, under federal healthcare programs, such as the Medicare and Medicaid programs.  There can be both criminal and civil penalties for violations;

 

·                   the federal civil False Claims Act, which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, false or fraudulent claims for payment of government funds or knowingly making, using or causing to be made or used, a false record or statement to get a false claim paid.  There are also criminal penalties, including imprisonment and criminal fines, for making or presenting a false or fictitious or fraudulent claim to the federal government;

 

·                   the federal Health Insurance Portability and Accountability Act of 1996 (HIPAA), which created federal criminal laws that prohibit, among other actions, knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program including private third-party payors;

 

·                   the federal Physician Payment Sunshine Act, which requires manufacturers of drugs, devices, biologics and medical supplies for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program  to report annually (with certain exceptions) to the Centers for Medicare & Medicaid Services (“CMS”) information related to payments or other “transfers of value” made to physicians and teaching hospitals, and requires applicable manufacturers and group purchasing organizations to report annually to CMS ownership and investment interests held by physicians and their immediate family members and payments or other “transfers of value” to such physician owners;

 

·                   the federal Foreign Corrupt Practices Act and similar anti-bribery laws in other jurisdictions, which generally prohibit companies and their intermediaries from making improper payments to government officials and/or other persons for the purpose of obtaining or retaining business; and

 

·                   analogous state and foreign law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any third-party payor, including commercial insurers; state laws that require device companies to comply with the industry’s voluntary compliance guidelines and the applicable compliance guidance promulgated by the federal government or otherwise restrict payments that may be made to healthcare providers and other potential referral sources; and state laws that require drug and device manufacturers to report information related to payments and other transfers of value to physicians and other healthcare providers or marketing expenditures, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.

 

Violations of any of the laws described above or any other governmental regulations are punishable by significant civil, criminal and administrative penalties, damages, fines and exclusion from government-funded healthcare programs, such as Medicare and Medicaid.  Although compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot be entirely eliminated.  Moreover, achieving and sustaining compliance with applicable federal and state privacy, security and fraud laws may prove costly.

 

12



Table of Contents

 

We are in a highly competitive and evolving field and face competition from well-established tissue processors and medical device manufacturers, as well as new market entrants.

 

Our business is in a very competitive and evolving field. Competition from other tissue processors, medical device companies and from research and academic institutions is intense, expected to increase, subject to rapid change and could be significantly affected by new product introductions. The presence of this competition in our market may lead to pricing pressure, which would make it more difficult to sell our products at a price that will make us profitable or prevent us from selling our products at all. Our success will depend on our ability to perfect and protect our intellectual property rights related to our technologies as well as to develop new technologies and new applications for our technologies. Our failure to compete effectively would have a material and adverse effect on our business, results of operations and financial condition.

 

Rapid technological change could cause our products to become obsolete.

 

The technologies underlying our products are subject to rapid and profound technological change. Competition intensifies as technical advances in each field are made and become more widely known. We can give no assurance that others will not develop services, products or processes with significant advantages over the products, services and processes that we offer or are seeking to develop. Any such occurrence could have a material and adverse effect on our business, results of operations and financial condition.

 

Our dependence upon human tissue necessary to produce our Biosurgery products may impact our ability to produce these products on a large scale.

 

Our Biosurgery products consist of human tissue. This tissue is obtained by us from not-for-profit donor procurement agencies. Grafix® is processed from human placental tissue. BIO 4™  is processed from deceased donor bone. Cartiform® is processed from deceased donor cartilage. While we are not aware of significant supply issues, and placental tissue and deceased donor bone and cartilage is generally available to us, the supplier agencies may not be able to provide us with sufficient amounts of tissue to meet the demand. In addition, the use of human tissue as a treatment for human disease and medical conditions has increased over recent years and continues to increase, creating greater and continually increasing competition and demand for donated human tissue. Even if we are successful in our efforts to expand our compliment of Biosurgery products, we may not be able to secure quantities of human tissue sufficient to meet the demand.

 

Our Biosurgery products are derived from human tissue and therefore have the potential for disease transmission.

 

The utilization of human tissue creates the potential for transmission of communicable disease, including but not limited to human immunodeficiency virus (HIV), viral hepatitis, syphilis, Creutzfeldt-Jakob disease, (the human form of “mad cow” disease), and other viral, fungal or bacterial pathogens. Although we are required to comply with federal and state regulations intended to prevent communicable disease transmission, and our suppliers of adult human bone, cartilage and placental tissue are also required to comply with such regulations in connection with their collection, storage and supply to us:

 

·                   we or our suppliers may fail to comply with such regulations;

 

·                   even with compliance, our products might nevertheless be viewed by the public as being associated with transmission of disease; and

 

·                   a patient that contracts an infectious disease might assert that the use of our products resulted in disease transmission, even if the patient became infected through another source.

 

Any actual or alleged transmission of communicable disease could result in patient claims, litigation, distraction of management’s attention and potentially increased expenses. Further, any failure in screening, whether by us or other manufacturers of similar products, could adversely affect our reputation, the support we receive from the medical community and overall demand for our products. As a result, such actions or claims, whether or not directed at us, could have a material adverse effect on our reputation with our customers and our ability to distribute our products, which could have a material adverse effect on our business, financial condition and results of operations.

 

13



Table of Contents

 

We may not be able to process our Biosurgery products in sufficient quantities to expand our market for the products.

 

We may encounter difficulties in the production of our Biosurgery products due to our limited manufacturing capabilities. This difficulty could reduce redistribution efforts of our products, increase our distribution costs or cause production delays, any of which could damage our reputation and effect our operations. Even if we have access to quantities of human tissue sufficient to allow us otherwise to expand our manufacturing capabilities, we may not be able to produce sufficient quantities of the product at an acceptable cost, or at all.

 

We use or may use third-party collaborators to help us develop and commercialize our products, and our ability to commercialize such products may be impaired or delayed if collaborations are unsuccessful.

 

We have arrangements in place with third-party collaborators as a means to help us with R&D efforts or marketing and distribution. We are subject to a number of risks associated with our dependence upon our collaborative relationships, including:

 

·                   our collaborators may not cooperate with us or perform their obligations under our agreements with them;

 

·                   we cannot control the quality, amount and timing of our collaborators’ resources that will be devoted to performing their responsibilities under our agreements with them, and our collaborators may choose to pursue alternative technologies in preference to those being developed or commercialized in collaboration with us;

 

·                   refusal to or failure of our collaborators to perform their responsibilities in a timely manner, including breach;

 

·                   the right of the collaborator to terminate its collaboration agreement with us for reasons outside our control, and in some cases on limited notice;

 

·                   business combinations and changes in a collaborator’s business strategy may adversely affect the party’s willingness or ability to complete its obligations;

 

·                   loss of significant rights to our collaborative parties if we fail to meet our obligations;

 

·                   disagreements as to ownership of clinical trial results or regulatory approvals;

 

·                   the ability of a collaborator to successfully market and promote our products;

 

·                   withdrawal of support by a collaborator following development or acquisition by the collaborator of competing products; and

 

·                   disagreements with a collaborator regarding the collaboration agreement or ownership of intellectual property or other proprietary rights.

 

Due to these factors and other possible events, we could suffer delays in the research, development or commercialization of our products or we may become involved in litigation or arbitration, which would be time consuming and expensive.

 

Our most significant collaborative arrangement is with a subsidiary of Stryker Corporation, and our success may depend upon performance on the part of Stryker and the success of this collaboration. We are also dependent upon our exclusive partnership with Arthrex, Inc. for the commercial distribution of Cartiform®, and may enter into and become dependent upon additional collaborations in the future.

 

We are party to an Exclusive Service Agreement with Howmedica Osteonics Corp., also referred to as Stryker Orthopaedics, a subsidiary of Stryker Corporation (“Stryker”), for the commercialization of our viable bone matrix allograft under the name BIO 4™ . Pursuant to the agreement, Stryker is the exclusive worldwide marketer and promoter of allograft services for BIO 4™  for use in surgical applications, including spine, trauma, extremity, cranial, and foot and ankle surgery. This collaboration is subject to all of the risks and uncertainties applicable to collaborative arrangements generally, including those described above. In addition, this collaboration is subject to a number of risks and uncertainties specific to the transaction and the parties.

 

14



Table of Contents

 

The agreement with Stryker provides for an initial four-year exclusive term, commencing in 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 years. Osiris received an initial exclusivity fee of $5.0 million and is 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 Osiris not fulfilling its supply obligations. Stryker is entitled to a certain percentage of sales of allograft services for BIO 4™  and has limited early termination rights. The success of this collaboration for us will in part be dependent upon Stryker, including its success in marketing and promoting BIO 4™ .

 

Stryker has significantly greater resources that we do, and this collaboration is not as core to its business as it is to ours. We are dependent upon Stryker’s continued performance under this collaboration, and any determination by Stryker not to proceed or perform, or any material adverse event that affects Stryker’s ability or desire to perform may have a material adverse effect on our business.

 

We are also dependent upon Arthrex, Inc. (“Arthrex”) for the commercial distribution of Cartiform®.  We have granted Arthrex exclusive commercial distribution rights for Cartiform®, and any determination by Arthrex not to proceed or perform, or any material adverse event that affects Arthrex’s ability or desire to perform may have a material adverse effect on our business.

 

We may also enter into additional collaborations in the future. If we fail to maintain our existing or any future collaborative relationships for any reason, we would need to undertake on our own and at our own expense, or find other collaborators, to perform the activities we currently anticipate will be performed by our collaborators. This may substantially increase our cash requirements. We may not have the capability or financial capacity to undertake these activities on our own, or we may not be able to find other collaborators on acceptable terms, or at all. This may limit the programs we are able to pursue and result in significant delays in the development, sale and manufacture of our products, and may have a material adverse effect on our business.

 

We distribute products through distribution arrangements that sometimes involve the consignment of inventory to third parties, which results in additional risk and uncertainty as to the viability of consigned inventory and as to inventory accounting.

 

We have historically distributed our Biosurgery products either ourselves or through third-party distributors who sometimes take possession of our inventory on a consignment basis, or through a combination of both methods. In some situations, we store consigned inventory on site in freezers at hospital or clinic facilities. We commercialize Grafix® through the efforts of our own focused direct distribution and marketing staff, as well as through a network of specialty distributors for certain target markets. Like Ovation®, BIO 4™  (formerly branded as OvationOS®) will sometimes be commercialized through a consignment arrangement, and our agreement with Stryker includes consignment terms, as does our agreement with Arthrex for Cartiform®. Because our consigned inventory must be stored at –80° C, it is at risk of thawing, resulting in the loss of that inventory. That risk of loss of is borne by us, although we believe that we maintain adequate insurance to cover the risk. Inventory management is complicated by a consignment arrangement, as is revenue recognition and inventory and receivables accounting. Thus, for example, no revenue is recognized upon the placement of inventory into consignment, as we retain title and maintain the inventory on our balance sheet. For these products, revenue is recognized when we receive appropriate notification that the product has been used in a surgical procedure. The Restatement corrects, among other things, errors in our prior revenue recognition related to various distributor agreements, including several with consigned inventory.  If we are unable to track and maintain proper controls related to consigned inventory, we could experience difficulty in accurately managing and accounting for these consignment arrangements.

 

We monitor and verify the condition and status of all consigned inventory on at least a quarterly basis, at additional expense to us.  As a result of the Restatement, we will likely incur additional expenses in connection with our planned improvements in our controls related to consigned inventory.  In addition, FDA, The American Association of Tissue Banks and other accrediting agency rules, regulations or standards require that we monitor our consigned inventory, and require tracking of human tissue and inventory as it moves through the supply chain. Moreover, as is the case with all of our inventory, should the FDA or any other regulatory authority determine that we are unable for any reason to continue to distribute consigned inventory, either on account of the viability of that inventory or because of the withdrawal of necessary approvals or other qualifications allowing for the distribution and sale of that inventory, the value of that inventory may have to be written off and our balance sheet adjusted accordingly. The complexity of our inventory management, or the application

 

15



Table of Contents

 

of rules, regulations and standards to our product inventory, or the occurrence of any of these negative events, could have an adverse effect on our business, financial condition and results of operations.

 

We are currently dependent upon third parties for services and raw materials needed for the processing of our Biosurgery products, and for distribution.

 

In order to produce our Biosurgery products we require biological media, reagents and other highly specialized materials. This is in addition to the human tissue donations used to manufacture our Biosurgery products. These items must be manufactured and supplied to us in sufficient quantities and in compliance with FDA Current Good Manufacturing Practice (“cGMP”) regulations. To meet these requirements, we have entered into supply agreements with firms that manufacture these components to cGMP standards.

 

We expect to continue to rely on third parties to sell or redistribute our Biosurgery products. Proper shipping and distribution requires compliance with specific storage and shipment procedures. Failure to comply with these procedures or the occurrence of inadvertent damage to the shipping container will necessitate return and replacement, potentially resulting in additional cost and causing us to fail to meet supply requirements. If any of these third parties fail or are unable to perform in a timely manner, our ability to manufacture and deliver could be compromised, and our business would be harmed.

 

Our dependence on third parties may increase the risk that we will not have adequate quantities of our Biosurgery products.

 

Our Biosurgery product supply chain and processing infrastructure depends on the performance of a number of complex contracts between us on the one hand and our suppliers and redistributors on the other. If any of our suppliers, distributors or other business partners cannot or do not perform their contractual obligations, then our production efforts may suffer. If we cannot or do not perform our contractual obligations, then we may be subject to arbitration, mediation or litigation that could have a material adverse effect on us.

 

Reliance on third parties entails risks to which we would not be subject if we manufactured such components ourselves, including:

 

·                   reliance on the third party for regulatory compliance and quality assurance;

 

·                   the possible breach of the manufacturing agreement by the third party; and

 

·                   the possible termination or nonrenewal of the agreement by the third party, based on its own business priorities, at a time that is costly or inconvenient for us.

 

Our suppliers, distributors and other third parties with which we contract are subject to many or all of the risks and uncertainties that we are subject to. Similar to us, they are subject to ongoing, periodic, unannounced inspection by the FDA and corresponding state and foreign agencies or their designees to ensure strict compliance with cGMP regulations and other governmental regulations and corresponding foreign standards. However, we do not control compliance with these regulations and standards by our suppliers, distributors and other third parties with which we contract. They might not be able to comply with these regulatory requirements. If they fail to comply with applicable regulations, the FDA or other regulatory authorities could impose sanctions on us, including fines, injunctions, civil penalties, denial of any required marketing approval, delays, suspension or withdrawal of approvals, license revocation, product seizures or recalls, operating restrictions and criminal prosecutions. Any of these actions could significantly and adversely affect the supply of our products and could have a material adverse effect on our business, financial condition and results of operations.

 

If our processing and storage facility is damaged or destroyed, our business and prospects would be negatively affected.

 

If our processing and storage facility or the equipment in the facility were to be significantly damaged or destroyed, we could suffer a loss of some or all of the stored product, raw and other materials, and work in process.

 

We lease approximately 61,203 square feet of space in Columbia, Maryland that houses essentially all of our corporate operations. Currently, we maintain insurance coverage totaling $22.8 million against damage to our property and equipment, an additional $5.0 million to cover business interruption and extra expenses and $7.3 million to cover R&D restoration expenses. If we have underestimated our insurance needs, we will not have sufficient insurance to cover losses above and beyond the limits on our policies.

 

16



Table of Contents

 

Ethical, legal and other concerns surrounding the use of human tissue may negatively affect public perception of us or our products, or may result in increased scrutiny of our products and product candidates from a regulatory approval perspective, thereby reducing demand for our products, restricting our ability to market our products or adversely affecting the market price for our common stock.

 

The commercial success of our Biosurgery products depends in part on general public acceptance of the use of human tissue for the treatment of human diseases and other conditions. While not as controversial as the use of embryonic stem cells and fetal tissue, the use of placental tissue and adult tissue has been the subject of substantial debate regarding related ethical, legal and social issues. We do not use embryonic stem cells or fetal tissue, but the public may not be able to, or may fail to, differentiate our use of placental or adult tissue from the use by others of embryonic stem cells or fetal tissue. Ethical concerns have been raised by some about the use of donated human tissue in a for-profit setting. This could result in a negative perception of our company or our products.

 

Future adverse events in the field of cellular-based therapy or changes in public policy could also result in greater governmental regulation of our products and potential regulatory uncertainty or delay relating to any required testing or approval.

 

Many of our competitors have greater resources or capabilities than we have, or may succeed in developing better products or in developing products more quickly than we do.

 

In the marketplace, we compete with other companies and organizations that are marketing or developing products competitive with Grafix® and our other Biosurgery products and products under development. In many cases, the competing product or candidate is based on traditional pharmaceutical, medical device or other therapies and technologies. Competitors competing with our Biosurgery products include, but are not limited to: Organogenesis, the manufacturer of Apligraf® and Dermagraft®, and MiMedx, the manufacturer of EpiFix® which competes with Grafix®. BIO 4™  competes with bone tissue products such as Osteocel® and Trinity®, while Cartiform® competes with cartilage allografts. In addition to those listed above, we have other existing and potential competitors developing a variety of treatments and therapies for the same conditions for which we market our products.

 

We also face competition in the cellular regenerative field from academic institutions and governmental agencies. Many of our current and potential competitors have greater financial and human resources than we have, including more experience in R&D and more established marketing and distribution capabilities.

 

We anticipate that competition in our industry will increase. In addition, the health care industry is characterized by rapid technological change, resulting in new product introductions and other technological advancements. Our competitors may develop and market products that render products now or in the future under development by us, or any products manufactured or marketed by us, non-competitive or otherwise obsolete.

 

The use of our Biosurgery products in human subjects may expose us to product liability claims, and we may not be able to obtain adequate insurance.

 

We face an inherent risk of product liability claims. None of our products have been widely used over an extended period of time, and therefore our safety data is limited. We derive the raw materials for our products from human donor sources, the production process is complex, and the handling requirements are specific, all of which increase the likelihood of quality failures and subsequent product liability claims. We may not be able to obtain or maintain product liability insurance on acceptable terms with adequate coverage, or at all. If we are unable to obtain insurance, or if claims against us substantially exceed our coverage, then our business could be adversely impacted. Whether or not we are ultimately successful in any product liability litigation, such litigation could consume substantial amounts of our financial and managerial resources and could result in, among other things:

 

·                   significant awards against us;

 

·                   substantial litigation costs;

 

·                   recall of the product;

 

·                   injury to our reputation;

 

17



Table of Contents

 

·                   withdrawal of clinical trial participants; or

 

·                   adverse regulatory action.

 

Any of these results could have a material adverse effect on our business, financial condition and results of operations.

 

In addition to costs incurred in product development and management of the regulatory approval and reimbursement processes, we will incur additional operating expenses in connection with the expansion of our Biosurgery business.

 

We expect to continue to incur significant operating expenses in connection with our planned expansion of our Biosurgery business, as we seek to:

 

·                   continue to develop, expand and support our distribution network of third-party distributors and independent sales professionals for the distribution of Grafix®, BIO 4™  and other Biosurgery products;

 

·                   continue to expand and support our internal sales force and marketing capabilities, through the hiring of sales and marketing professionals and building an internal sales and marketing organization;

 

·                   hire additional manufacturing, quality control, quality assurance and management personnel as necessary to expand our processing operations;

 

·                   expand our processing capacity for our Biosurgery products, which will require that we maintain a portion of our space as an FDA compliant and validated product manufacturing facility; and

 

·                   expand and protect our intellectual property portfolio for our Biosurgery products.

 

Our redistribution fees from our Biosurgery products have been limited to date. Our ability to scale up our production capabilities for larger quantities of these products remains to be proven. Our costs in marketing and distributing these products will also increase as production increases.

 

To be commercially successful, we must convince physicians that our products are   safe and effective alternatives to existing treatments and that our   products should be used in their procedures.

 

We believe physicians will only adopt our products if they determine, based on experience, clinical data and published peer reviewed journal articles, that the use of our products in a particular procedure is a favorable alternative to conventional methods.  Physicians may be slow to change their medical treatment practices for the following reasons, among others:

 

·                   their lack of experience with prior procedures in the field using our products;

 

·                   lack of evidence supporting additional patient benefits and our products over conventional methods;

 

·                   perceived liability risks generally associated with the use of new products and procedures;

 

·                   limited availability of reimbursement from third-party payers; and

 

·                   the time that must be dedicated to training.

 

In addition, hospital acquisition decisions often are affected by physicians’ assessments of products.  If physicians do not support adoption of our products or if we are unable to demonstrate favorable long-term clinical data, hospitals may not use our products, which would significantly reduce our ability to achieve expected revenue and would prevent us from sustaining profitability.

 

18



Table of Contents

 

We may implement a product recall or voluntary market withdrawal, which could significantly increase our costs, damage our reputation and disrupt our business.

 

The manufacturing, marketing and processing of our tissue products involves an inherent risk that our tissue products or processes do not meet applicable quality standards and requirements.  In that event, we may voluntarily implement a recall or market withdrawal or may be required to do so by a regulatory authority.  A recall or market withdrawal of one of our products would be costly and would divert management resources.  A recall or withdrawal of one of our products, or a similar product processed by another entity, also could impair sales of our products as a result of confusion concerning the scope of the recall or withdrawal, or as a result of the damage to our reputation for quality and safety.

 

Significant disruptions of information technology systems or breaches of information security could adversely affect our business.

 

We rely to a large extent upon sophisticated information technology systems to operate our business. In the ordinary course of business, we collect, store and transmit large amounts of confidential information (including, but not limited to, personal information and intellectual property). We also have outsourced significant elements of our operations to third parties, including significant elements of our information technology infrastructure and, as a result, we are managing many independent vendor relationships with third parties who may or could have access to our confidential information. The size and complexity of our information technology and information security systems, and those of our third-party vendors with whom we contract (and the large amounts of confidential information that is present on them), make such systems potentially vulnerable to service interruptions or to security breaches from inadvertent or intentional actions by our employees or vendors, or from malicious attacks by third parties. Such attacks are of ever-increasing levels of sophistication and are made by groups and individuals with a wide range of motives (including, but not limited to, industrial espionage and market manipulation) and expertise. While we have invested significantly in the protection of data and information technology, there can be no assurance that our efforts will prevent service interruptions or security breaches.  Any interruption or breach in our systems could adversely affect our business operations and/or result in the loss of critical or sensitive confidential information or intellectual property, and could result in financial, legal, business and reputational harm to us or allow third parties to gain material, inside information that they could use to trade in our securities.

 

Risks Related to Regulatory Approval and Other Government Regulations

 

Should the FDA determine that any of our products do not meet regulatory requirements that permit qualifying human cells, tissues and cellular and tissue-based products to be processed, stored, labeled and distributed without pre-marketing approval, we may be required to stop processing and distributing such products, or to narrow the indications for which those products are marketed.

 

The FDA has developed a tiered, risk-based regulatory framework, which includes criteria for facility management, quality assurance, donor selection and processing of human cells, tissues and cellular and tissue based products. We believe that commercial sale of Grafix® as a wound allograft for the treatment of acute and chronic wounds, including diabetic foot ulcers, does not require pre-marketing approval by the FDA because we believe that this product meets the regulatory definition of human cells, tissues and cellular and tissue-based products, or so-called 361 HCT/Ps (meaning that they comply with section 361 of the Public Health Service Act (PHSA) and with 21 CFR Part 1271). We received an “untitled letter” dated September 26, 2013 from the FDA stating, among other things, that both Grafix® and Ovation® do not meet these regulatory requirements because they are dependent upon the metabolic activity of living cells for their primary function and are not intended for autologous use or allergenic use in a first or second degree relative; and that Ovation® does not meet the minimal manipulation criterion. After discussions with, and providing additional information to, the FDA, we reached an agreement with the FDA confirming the regulatory status of Grafix® and allowing the product to remain on the market as an HCT/P and without FDA pre-marketing approval, as a wound allograft for the treatment of acute and chronic wounds. We further committed to the FDA that, before marketing Grafix® for certain expanded indications, we would submit a Biologics License Application (BLA) to the FDA and seek pre-marketing approval for any such additional indication. We also agreed to continue to transition our Ovation® product line over to OvationOS® (rebranded by Stryker as BIO 4™  in 2015) by no later than the second half of 2014, which we did. In August 2014, we stopped distributing promotional materials for Ovation® and ceased manufacturing the product. In October 2014, we stopped shipping Ovation® from our Columbia, MD facilities. At December 31, 2014, we owned some units of Ovation® located in the field for use in procedures by the end users. We believe that commercial distribution of BIO 4™ , a viable bone matrix for bone growth, and Cartiform®, a viable chondral allograft, does not require pre-marketing approval by the FDA because we believe that these products meet the regulatory definition of HCT/Ps.

 

We engage in ongoing discussion and communication with FDA representatives regarding the applicable regulatory requirements and pathways for our products and product candidates. The analysis and determination of compliance of a

 

19



Table of Contents

 

product with these regulatory requirements and pathways is complex and dependent upon numerous factors, and is readily subject to varying interpretations and conclusions. The FDA may not agree with our views on these matters. Should the FDA decide that Grafix®, BIO 4™  or any of our other Biosurgery products do not meet the regulatory definition of HCT/Ps, we will not be able to produce and redistribute these products unless and until we submit a BLA and obtain pre-marketing approval from the FDA, which would require clinical trials and could take years to obtain, at significant expense. This or any other determination by the FDA that adversely affects our ability to produce or to market any of our products or product candidates would have a material adverse effect on our business, financial condition and results of operations.

 

Our ability to expand the marketing claims for Grafix® and BIO 4™  is limited by Federal regulations, and will likely require the submission to the FDA of a biologics license application, or BLA, and the receipt of pre-marketing approval from the FDA, for the particular indication.

 

We cannot process, market or distribute our Biosurgery products without compliance with the United States Food Drug and Cosmetics Act, and comparable laws in foreign countries. 361 HCT/Ps may be processed, stored and distributed in the United States without FDA approval, provided that the product complies with the requirements of section 361 of the PHSA and 21 CFR Part 1271. Absent such compliance, a BLA is required as a condition to marketing and sale of the product. In order to obtain a BLA we would be required to conduct extensive preclinical studies and clinical trials to demonstrate that the product is safe and effective, and obtain required regulatory approvals. This process is costly and the product may fail to perform as we expect. Moreover, a product may ultimately fail to show the desired safety and efficacy traits despite having progressed successfully through preclinical or initial clinical testing. We would need to devote significant additional R&D, financial resources and personnel to obtain the necessary regulatory approvals, if required.

 

For the current label indications, for Grafix® and BIO 4™ , we rely upon the exception to the BLA requirement afforded 361 HCT/Ps.  However, compliance with these requirements limits our activities with respect of these products. For example, we will not be able to enhance tissue based products in a manner which would result in the product being more than “minimally manipulated” within the meaning of 21 CFR 1271.3(f). These and other limitations applicable to HCT/Ps limit the uses for which these products may be marketed. Moreover, the FDA continues to review and inspect marketed products, manufacturers and manufacturing facilities, and even if a BLA is not required initially, the FDA or its foreign equivalents may create additional regulatory burdens in the future or may reevaluate or modify current regulatory frameworks in a manner adverse to us.  In addition, later discovery of previously unknown problems with a product, a manufacturer or a facility—including those of or associated with a competitor or competing product—may result in the imposition of additional restrictions on us or our products, including a withdrawal of the product from the market. This would have a material adverse effect on our business, financial condition and results of operations.

 

If we are not able to conduct clinical trials properly and on schedule, or if any such clinical trials prove to be unsuccessful, we would be unable to secure sought after, or any required, regulatory approvals.

 

We are currently pursuing and in the future may pursue additional clinical trials for our Biosurgery products to enhance our ability to successfully market these products, or to obtain pre-marketing approval if required by the FDA for us to market certain products, or to market our products for expanded indications. Clinical trials are costly and time consuming. The completion of clinical trials may be delayed or terminated, or the costs may be increased, for many reasons, including, but not limited to, if:

 

·                   the FDA does not grant permission to proceed and places the trial on clinical hold;

 

·                   subjects do not enroll in our trials at the rate we expect;

 

·                   subjects experience an unacceptable rate or severity of adverse side effects;

 

·                   third-party clinical investigators do not perform our clinical trials on our anticipated schedule or consistent with the clinical trial protocol, Current Good Clinical Practice and regulatory requirements, or other third parties do not perform data collection and analysis in a timely or accurate manner;

 

·                   inspections of clinical trial sites by the FDA or Institutional Review Boards (“IRBs”) of research institutions participating in our clinical trials find regulatory violations that require us to undertake corrective action, suspend or terminate one or more sites, or prohibit us from using some or all of the data in support of our marketing applications; or

 

20



Table of Contents

 

·                   one or more IRBs suspends or terminates the trial at an investigational site, precludes enrollment of additional subjects, or withdraws its approval of the trial.

 

If we are unable to conduct clinical trials properly and on schedule, any potential marketing benefit may be lost, the reputation of the product could be damaged, and any required marketing approval may be delayed or denied by the FDA.

 

Tissue based products are generally subjected to greater regulatory scrutiny in many other countries as compared to the United States. These requirements may be costly and result in delay or otherwise preclude the distribution of our Biosurgery products in some foreign countries, any of which would adversely affect our ability to generate operating revenue.

 

Tissue-based products are regulated differently in different countries. We believe that commercial distribution of Grafix® as a wound allograft for the treatment of acute and chronic wounds, including diabetic foot ulcers, and the commercial distribution of BIO 4™ , a viable bone matrix for bone growth, do not require pre-market approval by the FDA in the United States because we believe that these products meet the regulatory definition of human cells, tissue, and cellular and tissue-based products, and qualify as 361 HCT/Ps. Many foreign jurisdictions have a different and more difficult regulatory pathway for human tissue-based products, which may prohibit the distribution of these products until the applicable regulatory agencies grant marketing approval, or licensure. The process of obtaining regulatory approval is lengthy, expensive and uncertain, and we may never seek such approvals, or if we do, we may never gain those approvals. Any sought after or required approvals in Europe will likely require that we conduct clinical trials, which are themselves are costly and time consuming, and subject to risk and uncertainty, and may prove to be unsuccessful. Any adverse events in our clinical trials for one of our products could negatively impact our other products.

 

If we seek regulatory approval in the United States or elsewhere for our Biosurgery products, either to enhance our ability to successfully market these products, or because we are required to do so by the FDA or equivalent foreign regulatory agencies, we may not be successful.

 

Should we decide to seek regulatory approval in the United States or elsewhere for our Biosurgery products, or should we be required to obtain such approvals before we can market a product generally or for a specific indication, any of the following factors may cause marketing approval to be delayed, limited or denied:

 

·                   our products will require significant pre-clinical and clinical development before applications for marketing approval can be filed with the FDA;

 

·                   data obtained from preclinical and nonclinical animal testing and clinical trials can be interpreted in different ways, and the FDA or its foreign counterpart may not agree with our interpretations;

 

·                   it may take many years to complete the testing of our products, and failure can occur at any stage of the process;

 

·                   negative or inconclusive results or adverse side effects during a clinical trial could cause us to delay or terminate development efforts for product;

 

·                   approval may be delayed if the FDA or its foreign counterpart requires us to expand the size and scope of the clinical trials; or

 

·                   negative results from clinical trials or failure to obtain pre-marketing approval of a HCP/T product not otherwise requiring such approval may result in a negative public perception of the product and loss of market share and revenue.

 

If we seek marketing approval—whether or not then necessary to market a particular product—and that approval marketing approval is delayed, limited or denied, our ability to market products, and our ability to generate product sales, would be adversely affected.

 

21



Table of Contents

 

We and our business are subject to rules and regulations regarding organ donation and transplantation.

 

Compliance with the issued operating standards established by The American Association of Tissue Banks is a requirement in order to become a licensed tissue bank. In addition, some states have their own tissue banking regulations. We are licensed as a tissue bank in Maryland, California, New York and Florida.

 

In addition, procurement of certain human organs and tissue for transplantation is subject to the restrictions of the National Organ Transplant Act (“NOTA”), which prohibits the transfer of certain human organs, including skin and related tissue, for valuable consideration, but permits the reasonable payment associated with the removal, transportation, implantation, processing, preservation, quality control and storage of human tissue and skin. We reimburse tissue banks for their expenses associated with the recovery, storage and transportation of donated human tissue that they provide to us for processing. We include in our pricing structure amounts paid to tissue banks to reimburse them for their expenses associated with the recovery and transportation of the tissue, in addition to certain costs associated with processing, preservation, quality control and storage of the tissue, marketing and medical education expenses, and costs associated with the development of tissue processing technologies. NOTA payment allowances may be interpreted to limit the amount of costs and expenses that we can recover in our pricing for our products, thereby reducing our future revenue and profitability. If we were to be found to have violated NOTA’s prohibition on the sale or transfer of human tissue for valuable consideration, we would potentially be subject to criminal enforcement sanctions, which could materially and adversely affect our business, financial condition and results of operations.

 

In Europe, regulations, if applicable, differ from one county to the next. Because of the absence of a harmonized regulatory framework and proposed regulation for advanced therapy medicinal products in Europe, as well as for other countries, the approval process for human derived cell or tissue-based medical products could be extensive, lengthy, expensive and unpredictable. Our Biosurgery products are subject to the country’s regulations that govern the donation, procurement, testing, coding, traceability, processing, preservation, storage and distribution of human tissues and cells and cellular and tissue-based products. These regulations include requirements for registration, listing, labeling, adverse-event reporting and inspection and enforcement. Some countries have their own tissue banking regulations.

 

Our business involves the use of hazardous materials that could expose us to environmental and other liability.

 

We have facilities in Maryland that are subject to various local, state and federal laws and regulations relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances, including chemicals, micro-organisms and various radioactive compounds used in connection with our R&D activities. In the United States, these laws include the Occupational Safety and Health Act, the Toxic Test Substances Control Act and the Resource Conservation and Recovery Act. We cannot assure you that accidental contamination or injury to our employees and third parties from hazardous materials will not occur. We do not have insurance to cover claims arising from our use and disposal of these hazardous substances other than limited clean-up expense coverage for environmental contamination due to an otherwise insured peril, such as fire.

 

We face significant uncertainty in the industry due to Government healthcare   reform.

 

There have been and continue to be proposals by the Federal Government, State Governments, regulators and third-party payers to control healthcare costs, and generally, to reform the healthcare system in the United States.  There are many programs and requirements for which the details have not yet been fully established or the consequences are not fully understood.  These proposals may affect aspects of our business.  We also cannot predict what further reform proposals, if any, will be adopted, when they will be adopted, or what impact they may have on us.

 

Risks Related to Intellectual Property

 

Given our patent position in regard to our Biosurgery products, if we are unable to protect the confidentiality of our proprietary information and know-how related to these products, our competitive position would be impaired and our business, financial condition and results of operations could be adversely affected.

 

A significant amount of our technology, including our teaching regarding the processing of our Biosurgery products, is unpatented and is maintained by us as trade secrets or confidential know-how. In an effort to protect this proprietary information, we require our employees, consultants, collaborators and advisors to execute confidentiality agreements upon the commencement of their relationships with us. These agreements require that all confidential information developed by the individual or made known to the individual by us during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties. These agreements, however, may not provide us with adequate protection against improper use or disclosure of trade secrets or confidential information, and these agreements may be breached. For example, a portion of the processing methodology and know-how for Grafix® is protected by trade secret or through

 

22



Table of Contents

 

confidentiality arrangements. A breach of confidentiality could affect our competitive position. In addition, in some situations, these agreements may conflict with, or be subject to, the rights of third parties with whom our employees, consultants, collaborators or advisors have previous employment or consulting relationships.

 

Also, others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets or know-how.

 

Because FDA approval is generally not required for tissue-based products which are not more than minimally manipulated, competitors might choose to enter this market and produce a substantially similar product, and we may not be able to prevent the marketing and distribution of any such similar products by others. Should others produce a substantially similar product, we will be subject to increased competition and our potential revenue from redistribution of these Biosurgery products may be limited.

 

Moreover, if our Biosurgery products infringe or are alleged to infringe intellectual property rights of third parties, these third parties could bring claims against us that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages. Further, if a patent infringement suit were brought against us, we could be forced to stop or delay research, development, manufacturing or redistribution of the product that is the subject of the suit.

 

Adequate remedies may not exist in the event of unauthorized use or disclosure of our confidential information. The disclosure of our trade secrets or know-how would impair our competitive position and could have a material adverse effect on our business, financial condition and results of operations.

 

If our patent position does not adequately protect our products, others could compete against us more directly, which would harm our business and have a material adverse effect on our financial condition and results of operations.

 

The patent position of biotechnology companies is generally highly uncertain, involves complex legal and factual questions and has been the subject of much litigation. Neither the United States Patent and Trademark Office nor the courts has a consistent policy regarding the breadth of claims allowed or the degree of protection afforded under many biotechnology patents.

 

The claims of our existing U.S. patents and those that may issue in the future, or those licensed to us, may not confer on us significant commercial protection against competing products. Even if we hold patents or have patent rights through licenses or otherwise with respect to a particular product, third parties may challenge, narrow, invalidate, design around or circumvent any patents now or hereafter owned, assigned or licensed to us. Patents with broader claims tend to be more vulnerable to challenge by other parties than patents with extremely narrow claims. Also, our pending patent applications may not issue, may issue with substantially narrower claims than currently pending claims, or we may not receive any additional patents. Further, the laws of foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States. Our patents might not contain claims that are sufficiently broad to prevent others from utilizing our technologies. Consequently, our competitors may independently develop competing products that do not infringe our patents or other intellectual property.

 

Because of the extensive time required for development, testing and regulatory review of a potential product, it is possible that, before any of our products can be commercialized, any related patent may expire or remain in force for only a short period following commercialization, thereby reducing any advantages of the patent. A significant amount of our technology, including our teaching regarding the production processes for our Biosurgery products, is unpatented and is maintained by us as trade secrets. The lack of patent protection for our Biosurgery products reduces the barrier for entry by others and makes these products susceptible to increased competition, which could be harmful to our business.

 

If we are unable to protect the confidentiality of our proprietary information, trade secrets and know-how, our competitive position would be impaired and our business, financial condition and results of operations could be adversely affected.

 

Significant aspects of our Biosurgery product technology, especially the teaching regarding the manufacturing processes for these products, are unpatented and maintained by us as trade secrets or proprietary know-how. In an effort to protect these trade secrets and know-how, we require our employees, consultants, collaborators and advisors to execute confidential disclosure agreements before the commencement of their relationships with us. These agreements require that all confidential information developed by the individual or made known to the individual by us during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties. These agreements, however, may not provide us with adequate protection against improper use or disclosure of confidential information, and these agreements

 

23



Table of Contents

 

may be breached. A breach of confidentiality could affect our competitive position. In addition, in some situations, these agreements may conflict with, or be subject to, the rights of third parties with whom our employees, consultants, collaborators or advisors have previous employment or consulting relationships. Also, others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets.

 

Adequate remedies may not exist in the event of unauthorized use or disclosure of our confidential information. The disclosure of our trade secrets or know-how would impair our competitive position and could have a material adverse effect on our business, financial condition and results of operations.

 

If we infringe or are alleged to infringe intellectual property rights of third parties, it will adversely affect our business, financial condition and results of operations.

 

Our research, development and commercialization activities, and the manufacture or distribution of our Biosurgery products, may infringe or be alleged to infringe patents owned by third parties and to which we do not hold licenses or other rights. There may be applications that have been filed but not published that, when issued, could be asserted against us. These third parties could bring claims against us that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages. Further, if a patent infringement suit were brought against us, we could be enjoined from certain activities including a stop or delay in research, development, manufacturing or sales activities related to the product or biologic drug candidate that is the subject of the suit.

 

As a result of patent infringement claims, or in order to avoid potential claims, we may choose or be required to seek a license from the third party. These licenses may not be available on acceptable terms, or at all. Even if we are able to obtain a license, the license would likely obligate us to pay license fees or royalties or both, and the rights granted to us might be nonexclusive, which could result in our competitors gaining access to the same intellectual property. Ultimately, we could be prevented from commercializing a product, or be forced to cease some aspect of our business operations, if, as a result of actual or threatened patent infringement claims, we are unable to enter into licenses on acceptable terms.

 

There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical and biotechnology industries. In addition to infringement claims against us, we may become a party to other patent litigation and other proceedings, including interference and reexamination proceedings declared by the United States Patent and Trademark Office and opposition proceedings before the patent offices for other countries (e.g. the European Patent Office) or similar adversarial proceedings, regarding intellectual property rights with respect to our products and technology. The cost to us of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources. Patent litigation and other proceedings may also absorb significant management time. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace and, as a result, on our business, financial condition and results of operations. To the extent that our employees, consultants or contractors use intellectual property owned by others, disputes may arise as to the rights related to or resulting from the use of such intellectual property.

 

We may become involved in lawsuits to protect or enforce our patents or the patents of our collaborators or licensors, which could be expensive and time consuming.

 

Litigation may be necessary to enforce patents issued or licensed to us, to protect trade secrets or know-how, or to determine the scope and validity of proprietary rights. Litigation, opposition or interference proceedings could result in substantial additional costs and diversion of management focus. If we are ultimately unable to protect our technology, trade secrets or know-how, we may be unable to operate profitably.

 

Competitors may infringe our patents or the patents of our collaborators or licensors. As a result, we may be required to file infringement claims to protect our proprietary rights. This can be expensive, particularly for a company of our size, and time-consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours is invalid or is unenforceable, or may refuse to enjoin the other party from using the technology at issue. An adverse determination of any litigation or defense proceedings could put one or more of our patents at risk of being invalidated or interpreted narrowly. Interference proceedings brought by the United States Patent and Trademark Office may be necessary to determine the priority of inventions with respect to our patent applications or those of our collaborators or licensors. Litigation or interference proceedings may fail and, even if successful, may result in substantial costs and distraction to our management. We may not be able, alone or with our collaborators and licensors, to prevent misappropriation of our proprietary rights, particularly in countries where the laws may not protect such rights as fully as in the United States.

 

24



Table of Contents

 

Furthermore, though we would seek protective orders where appropriate, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. In addition, during the course of this kind of litigation, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If investors perceive these results to be negative, the market price for our common stock could be significantly harmed.

 

The biotechnology industry, including our fields of interest, is highly competitive and subject to significant and rapid technological change. Accordingly, our success will depend, in part, on our ability to respond quickly to such change through the development and introduction of new products. Our ability to compete successfully against currently existing and future alternatives to our products, and against competitors who compete directly with us, will depend, in part, on our ability to: attract and retain skilled scientific and research personnel; develop technologically superior products; develop competitively priced products; obtain patent or required regulatory approvals for our products;  be early entrants to the market; and manufacture, market and sell our products, independently or through collaborations. If a third party were to commercialize a competitive product, there is no assurance that we would have a basis for initiating patent infringement proceedings or that, if initiated, we would prevail in such proceedings.

 

Risk Factors Regarding the Sale of our ceMSC Business

 

We may not receive all of the payments available to us under the terms of the Purchase Agreement, and accordingly, we may have less cash available to us to fund our operations.

 

The terms of our Asset Purchase Agreement (the “Purchase Agreement”) with Mesoblast International SARL (“Mesoblast”), a wholly owned subsidiary of Mesoblast Limited (“Mesoblast Limited”), for the sale of our culture-expanded mesenchymal stem cell (“ceMSC”) business provide for payment to us of $50 million in initial consideration, and up to an additional $50 million upon the achievement by Mesoblast of certain clinical and regulatory milestones. Additionally, we are entitled to earn single to low double digit cash royalties on future sales by Mesoblast of Prochymal and other products utilizing the acquired ceMSC technology.

 

We have received all of the $50 million in initial consideration, consisting of $35 million in cash and $15 million in Mesoblast Limited ordinary shares. The shares received were subject to a one-year holding period that initially ended in December 2014 and was ultimately extended through May 2015. Mesoblast Limited provided the Company limited downside protection against a decline in the market value of these shares during this holding period. The Mesoblast Limited shares are classified as Trading Securities in the Company’s balance sheets as of December 31, 2014 and 2013 and accounted for on a marked-to-market basis. In May 2015 Mesoblast Limited paid the Company $6.2 million upon expiration of the limited downside market value protection provided during the designated holding period.  Later in 2015 the Company sold all of its Mesoblast Limited shares for $6.5 million.

 

Our ability to receive the second $50 million is subject to satisfaction of a series of milestones, all of which are largely dependent upon the clinical and regulatory success of Mesoblast and other factors not in our control. These include many if not all of the risks and uncertainties that our ceMSC business was subject to prior to its sale to Mesoblast, including product development, efficacy and regulatory risks. We have received no such payments thus far, nor do we have any expectation of receiving any such payments in the foreseeable future. Our ability to earn royalty payments from Mesoblast is subject to these same risks and will require performance by Mesoblast that results in its meeting some or all of the milestones referred to above, and is thereafter also dependent upon the commercial success of Mesoblast’s ceMSC business. Royalties, if any, are payable to us in cash. Any portion of the second $50 million that becomes payable to us will be payable, at the discretion of Mesoblast, in Mesoblast Limited ordinary shares, based on a then current valuation of such shares.

 

Any portion of the second $50 million in consideration paid in Mesoblast Limited ordinary shares will also be, is subject to a one year holding period, with limited downside protection for a drop in the Mesoblast Limited share price over the holding period. Therefore, any such payment, if made, will be are subject to investment risk, and because the Mesoblast Limited ordinary shares are traded on the Australian Stock Exchange and the per share price is denominated in Australian Dollars, will also be subject to foreign currency exchange risk.

 

Accordingly, not only do we have no assurances that any of the second $50 million in consideration will ever be paid to or received by us, but also we may be unable to liquidate on favorable terms any amounts paid to us in Mesoblast Limited ordinary shares. As a result, we may have less cash available to fund our remaining operations and to support the

 

25



Table of Contents

 

continued development and pursuit of our Biosurgery business, and our financial condition or results of operations could be materially adversely affected.

 

The Purchase Agreement exposes us to contingent liabilities and other risks that could adversely affect our business or financial condition.

 

In the Purchase Agreement, we have made customary representations and warranties and the parties have agreed to indemnify each other for breaches of representations, warranties and covenants contained in the Purchase Agreement. Also pursuant to the Purchase Agreement, we have retained a royalty-free license to all transferred intellectual property, insofar as necessary for us to continue in our other businesses, including our Biosurgery business, and we have agreed not to compete with Mesoblast in the ceMSC business for a period of eight years. The Purchase Agreement also subjects us to other risks typical in business transactions of this type, including payment and performance risks. Should disputes arise or should we incur liability for breach of any of these representations, warranties or obligations, or should any of these other risks materialize, our business, financial condition or results of operations could be materially adversely affected.

 

Our long-term business prospects will depend on the success of our Biosurgery business.

 

As a result of the sale of our ceMSC business, including Prochymal, our Biosurgery business is our sole remaining business, and our overall business is less diverse. Our long-term business prospects will, therefore, be dependent almost entirely on the success of our Biosurgery business. This business involves significant risks and challenges in regards to product development and optimization, manufacturing, government regulation, intellectual property, third-party reimbursement and market acceptance, among other risks previously disclosed by us.

 

Risks Related to Our Common Stock

 

The trading price of the shares of our common stock is highly volatile, and purchasers of our common stock could incur substantial losses.

 

Our stock price is volatile. The stock market in general and the market for biotechnology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above the price they paid for it. The market price for our common stock may be influenced by many factors, including:

 

·       our recent suspension from trading and upcoming delisting of our common stock from Nasdaq;

 

·                   loss of investor confidence in us due to the Restatement, the delisting and related matters;

 

·       the lack of a trading market in our common stock as a result of not trading on Nasdaq;

 

·                   the recent changes in our senior management team, and any delays or difficulties in identifying permanent members of the team to replace interim officers;

 

·                   results of clinical trials or those of our competitors;

 

·                   regulatory developments in the United States and foreign countries, both generally or specific to us and our products;

 

·                   variations in our financial results or those of companies that are perceived to be similar to us;

 

·                   changes in the structure of healthcare payment systems;

 

·                   announcements by us of significant acquisitions, strategic partnerships, joint ventures or capital commitments;

 

·                   market conditions in the pharmaceutical and biotechnology sectors and issuance of securities analysts’ reports or recommendations;

 

·                   sales of substantial amounts of our stock by existing stockholders;

 

·                   sales of our stock by insiders and 5% stockholders;

 

26



Table of Contents

 

·                   general economic, industry and market conditions;

 

·                   additions or departures of key personnel;

 

·                   intellectual property, product liability or other litigation against us;

 

·                   expiration or termination of our relationships with our collaborators; and

 

·                   the other factors described in this “Risk Factors” section.

 

In addition, in the past, stockholders have initiated class action lawsuits against biotechnology and pharmaceutical companies following periods of volatility in the market prices of these companies’ stock. Such litigation, if instituted against us, could cause us to incur substantial costs and divert management’s attention and resources, which could have a material adverse effect on our business, financial condition and results of operations.

 

As a result of the Restatement and our failure to file SEC reports, we have not been in compliance with Nasdaq Stock Market LLC’s requirements for continued listing and, as a result, our common stock was suspended from trading on Nasdaq on March 14, 2017, which could have a material effect on us and our stockholders. We expect that our common stock will be delisted from Nasdaq promptly after Nasdaq files a Form 25 with the SEC. See “We have not been in compliance with Nasdaq Stock Market LLC’s requirements for continued listing and, as a result, our common stock has been suspended from trading on Nasdaq, which we expect to have a material effect on us and our stockholders.”

 

Certain provisions of Maryland law and of our charter and bylaws contain provisions that could delay and discourage takeover attempts and any attempts to replace our current management by stockholders.

 

Certain provisions of Maryland General Corporation Law (“MGCL”) and of our Maryland charter and Maryland bylaws contain provisions that may make it more difficult to or prevent a third party from acquiring control of us or changing our Board of Directors and management. These include, but are not limited to, the following:

 

·                   authorization of the board of directors to issue shares of preferred stock generally without stockholder approval;

 

·                   requirements that special meetings of stockholders may only be called by the chairman of the board of directors, upon request of stockholders holding at least 20% of the capital stock issued and outstanding, or upon a resolution adopted by, or an affirmative vote of, a majority of the board of directors; and

 

·                   requirements that our stockholders comply with advance notice procedures in order to nominate candidates for election to our Board of Directors or to place stockholders’ proposals on the agenda for consideration at meetings of stockholders.

 

Maryland law also prohibits “business combinations” between us and an interested stockholder or an affiliate of an interested stockholder for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange or, in certain circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. Maryland law defines an interested stockholder as any person who beneficially owns 10% or more of the voting power of the corporation’s stock, or an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the corporation’s then-outstanding voting stock. A person is not an interested stockholder if the board of directors of the corporation approved in advance the transaction by which the person otherwise would have become an interested stockholder. However, such approval may be conditional.

 

After the five-year prohibition, any business combination between the corporation and an interested stockholder or an affiliate of an interested stockholder generally must be recommended by the board of directors and approved by the affirmative vote of at least 80% of the votes entitled to be cast by holders of the then-outstanding shares of voting stock, and two-thirds of the votes entitled to be cast by holders of the voting stock other than stock held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or stock held by an affiliate or associate of the interested stockholder. These super-majority vote requirements do not apply if the holders of the common stock receive a minimum price, as defined under Maryland law, for their stock in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its stock.

 

The statute permits various exemptions from its provisions, including business combinations that are approved or exempted by the board of directors before the time that the interested stockholder becomes an interested stockholder. Our

 

27


 


Table of Contents

 

Board of Directors has not exempted us from the business combination statute. Consequently, unless the Board of Directors adopts an exemption from this statute in the future, the statute will be applicable and may affect business combinations between us and other persons. The statute may discourage others from trying to acquire control of us or increase the difficulty of consummating any such acquisition.

 

Our bylaws also contain a provision exempting us from the “control share acquisition” provisions of the MGCL (Sections 3-701 through 3-709). We can provide no assurance that such provision of our bylaws will not be amended or eliminated in the future. Should this happen, the control share acquisition provisions would become effective and may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.

 

Subtitle 8 of Title 3 of the MGCL (“Subtitle 8”) permits a Maryland corporation with a class of equity securities registered under the Exchange Act, and with at least three independent directors to elect to be subject to any or all of five provisions:

 

·                   a two-thirds vote requirement to remove a director;

 

·                   a requirement that the number of directors be fixed only by the vote of the directors;

 

·                   a requirement that a vacancy on the board be filled only by the remaining directors and for the remainder of the full term of the directorship in which the vacancy occurred rather than until the next annual meeting of stockholders as would otherwise be the case; and

 

·                   a majority requirement for the calling of a special meeting of stockholders.

 

An eligible Maryland corporation like us can elect into this statute by provision in its charter or bylaws or by a resolution of its board of directors, without stockholder approval. Furthermore, we can elect to be subject to the above provisions regardless of any contrary provisions in the charter or bylaws. Pursuant to Subtitle 8, we have elected to provide that vacancies on our Board of Directors may be filled only by the remaining directors and for the remainder of the full term of the class of directors in which the vacancy occurred. Through provisions in our charter and bylaws unrelated to Subtitle 8, we have a classified board, and the number of our directors may be fixed only by the vote of the directors.

 

Concentration of ownership of our common stock among our existing executive officers, directors and principal stockholders may prevent others from influencing significant corporate decisions, and provisions in our charter allowing for a stockholder vote by consent in lieu of a meeting may make it easier for stockholders holding a majority of our common stock to take action.

 

Our executive officers, directors and beneficial owners of 5% or more of our common stock and their affiliates, in aggregate, beneficially own approximately 54% of our outstanding common stock as of March 1, 2015. Included among this 54%, Peter Friedli, the Chairman of the Board of Directors, and certain entities with which he is affiliated, beneficially own approximately 43% of our outstanding common stock as of March 1, 2015. These persons, acting together, will be able to significantly influence all matters requiring stockholder approval, including the election and removal of directors and any merger or other significant corporate transactions. The interests of this group of stockholders may not coincide with our interests or the interests of other stockholders.

 

Moreover, as permitted by the MGCL, our charter provides that the holders of common stock entitled to vote generally in the election of directors may take action or consent to any action by delivering a consent in writing or by electronic transmission of the stockholders entitled to cast not less than the minimum number of votes (which is generally either a majority of votes cast or a majority of votes entitled to be cast) that would be necessary to authorize or take the action at a stockholders meeting if the corporation gives notice of the action not later than ten (10) days after the effective date of the action to each holder of the class of common stock and to each stockholder who, if the action had been taken at a meeting, would have been entitled to notice of the meeting.

 

Accordingly, these persons acting together, and Mr. Friedli specifically, currently has, and will continue to have, a significant influence over the outcome of all corporate actions requiring stockholder approval, including any actions that may be taken by stockholder consent in lieu of a meeting.

 

28



Table of Contents

 

Risks Related to the Restatement of our Financial Statements

 

We have restated our prior financial statements, which may lead to additional risks and uncertainties, including loss of investor confidence and negative impacts on our stock price.

 

As discussed in the Explanatory Note and Note 2 to the Company’s financial statements included in Part II, Item 8 of this Form 10-K/A, we have restated our audited financial statements for the year ended December 31, 2014, and our unaudited financial statements for all interim periods  in 2014 (the “Restated Periods”). The determination to restate the financial statements for the Restated Periods was made by our Audit Committee upon management’s recommendation to address discovered errors. Due to the errors, our Audit Committee concluded that our previously issued financial statements for the Restated Periods should no longer be relied upon. We have filed this Form 10-K/A to, among other things, reflect the restatement of our financial statements for the Restated Periods.

 

As a result of these events, we have become subject to a number of additional costs and risks, including unanticipated costs for accounting and legal fees in connection with or related to the Restatement and the remediation of our ineffective disclosure controls and procedures and material weakness in internal control over financial reporting. In addition, the attention of our management team has been diverted by these efforts. We are subject to shareholder, governmental and other actions in connection with the Restatement and related matters.  In addition, the Restatement and related matters could impair our reputation or could cause our counterparties to lose confidence in us. Each of these occurrences could have a material adverse effect on our business, financial condition, results of operations and stock price.

 

Our management has identified material weaknesses in the Company’s internal control over financial reporting which could, if not remediated, result in additional material misstatements in our consolidated financial statements. We may be unable to develop, implement and maintain appropriate controls in future periods.

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, and the Sarbanes-Oxley Act of 2002 and SEC rules require that our management report annually on the effectiveness of the Company’s internal control over financial reporting. Among other things, our management must conduct an assessment of the Company’s internal control over financial reporting to allow management to report on, and our independent registered public accounting firm to audit, the effectiveness of the Company’s internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. As disclosed in Part II, Item 9A, “Controls and Procedures” of this Form 10-K/A, our management, with the participation of our current president and chief executive officer and our current chief financial officer, has determined that we have material weaknesses in the Company’s internal control over financial reporting as of December 31, 2014 related to the Company’s control environment and specific control activities. Some of these material weaknesses contributed to the material misstatements in our previously filed annual audited and interim unaudited consolidated financial statements.

 

A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. We are actively engaged in developing and implementing a remediation plan designed to address such material weaknesses. However, additional material weaknesses in the Company’s internal control over financial reporting may be identified in the future. Any failure to implement or maintain required new or improved controls, or any difficulties we encounter in their implementation, could result in additional material weaknesses, or could result in material misstatements in our consolidated financial statements. These misstatements could result in a further restatement of our consolidated financial statements, cause us to fail to meet our reporting obligations, reduce our ability to obtain financing or cause investors to lose confidence in our reported financial information, leading to a decline in our stock price.

 

Although we are working to remedy the ineffectiveness of the Company’s internal control over financial reporting, there can be no assurance as to when the remediation plan will be fully developed, when it will be fully implemented or the aggregate cost of implementation. Until our remediation plan is fully implemented, our management will continue to devote significant time and attention to these efforts. If we do not complete our remediation in a timely fashion, or at all, or if our remediation plan is inadequate, there will continue to be an increased risk that we will be unable to timely file future periodic reports with the SEC and that our future consolidated financial statements could contain errors that will be undetected. Further and continued determinations that there are material weaknesses in the effectiveness of the Company’s internal control over financial reporting could also reduce our ability to obtain financing or could increase the cost of any financing we obtain and require additional expenditures of both money and our management’s time to comply with applicable

 

29



Table of Contents

 

requirements. For more information relating to the Company’s internal control over financial reporting, the material weaknesses that existed as of December 31, 2014 and the remediation activities undertaken by us, see Part II, Item 9A, “Controls and Procedures” of this Form 10-K/A.

 

We and certain of our current and former directors and executive officers have been named as defendants in litigation actions that could result in substantial costs and divert management’s attention.

 

We are currently party to legal and other proceedings which are described under Part II, Item 3, “Legal Proceedings”, of this Form 10-K/A. We, and certain of our executive officers, have been named as defendants in purported class action lawsuits that allege, among other things, that the defendants made materially false or misleading statements and material omissions in the Company’s SEC filings in violations of federal securities laws. Further, shareholder derivative complaints have been filed in Maryland against individual members of the Company’s board of directors and certain executive officers alleging, among other things, that the 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) were unjustly enriched at the expense of, and to the detriment of, the Company. These matters may involve substantial expense to us, which could have a material adverse impact on our financial position and our results of operations. We can provide no assurances as to the outcome of any litigation.

 

In addition, the volatility in our stock price may make us more vulnerable to future litigation.

 

Any adverse judgment in or settlement of the pending or any future litigation could require payments that exceed the limits of our available directors’ and officers’ liability insurance, which could have a material adverse effect on our operating results or financial condition.

 

We face risks related to ongoing SEC and U.S. Attorney investigations.

 

As previously disclosed on March 15, 2016, the Company received a subpoena from the SEC, which is conducting a non-public investigation relating to the Company’s historic accounting practices (the “SEC Investigation”). As previously disclosed on May 27, 2016, the Company has been advised by the United States Attorney’s Office for the Southern District of New York (the “U.S. Attorney”) that a criminal investigation has been opened by that office into what the Company understands to be the matters of the SEC Investigation (together with the SEC Investigation, the “Investigations”).  See Part II, Item 3, “Legal Proceedings”, of this Form 10-K/A, for a discussion of the Investigations. The Company is cooperating fully with the Investigations. At this point, we are unable to predict what the outcomes of the Investigations may be or what, if any, consequences the Investigations may have with respect to the Company or any current or former Company personnel. However, the Investigations could result in considerable legal expenses, divert management’s attention from other business concerns and harm our business. If the SEC or U.S. Attorney were to determine that legal violations occurred, we could be required to pay significant civil and/or criminal penalties and/or other amounts and we could become subject to a cease and desist order and/or other remedies or conditions imposed as part of any resolution. The filing of our restated financial statements in this Form 10-K/A to correct the discovered accounting errors will not resolve the Investigations. We can provide no assurances as to the outcome of the Investigations.

 

Our failure to prepare and timely file our periodic reports with the SEC limits our access to the public markets to raise debt or equity capital.

 

We did not file an Annual Report on Form 10-K for the year ended December 31, 2015 or Quarterly Reports on Form 10-Q for the quarters ended March 31, 2016, June 30, 2016 and September 30, 2016 within the timeframe required by the SEC. Because we have not remained current in our reporting requirements with the SEC, we are limited in our ability to access the public markets to raise debt or equity capital. Our limited ability to access the public markets could prevent us from pursuing transactions or implementing business strategies that we might otherwise believe are beneficial to our business. Even if we maintain compliance with our SEC reporting obligations prospectively, until one year from the date we regain and maintain status as a current filer, we will be ineligible to use shorter and less costly filing forms, such as Form S-3, to register our securities for sale. We may use Form S-1 to register a sale of our stock to raise capital or complete acquisitions, but doing so would likely take longer that using a shorter and less costly form, increase transaction costs and adversely impact our ability to raise capital or complete acquisitions of other companies in a timely manner.

 

30



Table of Contents

 

We have not been in compliance with Nasdaq Stock Market LLC’s requirements for continued listing and, as a result, our common stock has been suspended from trading on Nasdaq, which we expect to have a material effect on us and our stockholders.

 

As a result of the Restatement, we are delinquent in the filing of our Annual Report on Form 10-K for the year ended December 31, 2015 and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2016, June 30, 2016 and September 30, 2016, which has caused us to be out of compliance with the rules of Nasdaq. On November 10, 2016, we participated in a hearing before the Nasdaq Hearings Panel, which granted our request that we be provided through March 10, 2017 to become a current filer without being delisted. However, we were not able to file all delinquent filings by March 10, 2017 and our common stock was suspended from trading on Nasdaq on March 14, 2017. Nasdaq will file a Form 25 to formally delist our common stock. There can be no assurance whether or when our common stock will again be listed for trading on Nasdaq or any other national securities exchange. Further, the market price of our shares might decline and become more volatile, and our shareholders may find that their ability to trade in our stock would be adversely affected. Furthermore, institutions whose charters do not allow them to hold securities in unlisted companies might sell our shares, which could have a further adverse effect on the price of our stock.

 

ITEM 3.  Legal Proceedings

 

As previously disclosed in the Company’s Current Report on Form 8-K filed on March 15, 2016, various shareholder lawsuits have been filed against the Company and certain of its officers and directors since the disclosure of the Company’s accounting review and intention to restate certain prior period financial statements.

 

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. 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 SEC filings 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.  Subsequently, on August 15, 2016, the Court entered an order providing that the lead plaintiff shall file an amended complaint no later than 15 days after the Company files amended financial statements with the SEC.

 

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 individual members of the Company’s board of directors and certain 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 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.

 

As disclosed in the March 15 Form 8-K, the Company has received a subpoena from the SEC relating to a non-public investigation relating to its historic accounting practices, which have been under independent review by the Audit Committee of the Company’s Board of Directors, with the assistance of outside professionals. Counsel to the Audit Committee also has voluntarily advised the SEC about the Independent Review. The Company is cooperating fully with the SEC in this matter.

 

As disclosed in the Company’s Current Report on Form 8-K filed on May 27, 2016, the Company was contacted by the United States Attorney, and was notified that a criminal investigation had been opened by that office, which to the Company’s knowledge is considering the same issues that are under review by the SEC. The Company is cooperating fully with the U.S. Attorney in this matter.

 

31



Table of Contents

 

On July 26, 2016, an alleged shareholder of the Company filed a complaint in the Circuit Court for Howard County in the State of Maryland (Case 13C16108356) against the Company and certain directors captioned Brian C. Lee v. Osiris Therapeutics, Inc., et al .  The plaintiff alleged that the Company and its directors failed to schedule or hold an annual meeting within the time period allegedly required by the Company’s bylaws and Maryland law. On March 1, 2017, the parties executed a settlement agreement that will resolve the litigation if the Company provides shareholders with certain additional information on or before March 30, 2017. The Company intends to fulfill its obligations pursuant to the settlement agreement and expects this complaint to be voluntarily dismissed with prejudice.

 

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 individual members of the Company’s board of 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.

 

32



Table of Contents

 

PART II

 

ITEM 6.  Selected Financial Data.

 

The following tables of selected financial data of the Company have been prepared in accordance with GAAP.  As discussed in the Explanatory Note to this Form 10-K/A, the Company has (i) restated its audited financial statements for the year ended December 31, 2014 and the Restatement has been reflected in the 2014 information provided below, and (ii) revised its financial statements for the years ended December 31, 2013, 2012 and 2011 to correct immaterial errors and those revisions are reflected in the 2013, 2012 and 2011 information provided below. For more information, see Note 2 to the Company’s financial statements included in Part II, Item 8 of this Form 10-K/A. The financial data as of December 31, 2014, 2013 and 2012 and for the years ended December 31, 2014, 2013 and 2012 should be read in conjunction with, and are qualified in their entirety by, reference to Part II,   Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and notes thereto included in this Form 10-K/A.

 

 

 

Year ended December 31,

 

(in thousands)

 

2014

 

2013

 

2012

 

2011

 

2010

 

 

 

(Restated)

 

 

 

 

 

 

 

 

 

Product revenue

 

$

50,835

 

$

25,698

 

$

7,164

 

$

1,001

 

$

183

 

Cost of product revenue

 

9,886

 

6,851

 

2,420

 

467

 

62

 

Gross profit

 

40,949

 

18,847

 

4,744

 

534

 

121

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

3,414

 

4,330

 

4,059

 

4,340

 

4,399

 

Sales and marketing

 

36,384

 

13,810

 

2,836

 

 

 

General and administrative and other

 

8,135

 

2,718

 

4,202

 

7,169

 

6,450

 

Total operating expenses

 

47,933

 

20,858

 

11,097

 

11,509

 

10,849

 

Loss from operations

 

(6,984

)

(2,011

)

(6,353

)

(10,975

)

(10,728

)

Other (expense) income, net

 

(1,771

)

414

 

49

 

100

 

175

 

Loss from continuing operations, before income taxes

 

(8,775

)

(1,597

)

(6,304

)

(10,875

)

(10,553

)

Income tax (expense) benefit

 

(97

)

994

 

37

 

775

 

(241

)

Loss from continuing operations

 

(8,852

)

(603

)

(6,267

)

(10,100

)

(10,794

)

(Loss) income from discontinued operations

 

(1,118

)

43,063

 

(5,318

)

24,794

 

23,919

 

Net (loss) income

 

$

(9,970

)

$

42,460

 

$

(11,585

)

$

14,694

 

$

13,125

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic loss per share from continuing operations

 

$

(0.26

)

$

(0.02

)

$

(0.19

)

$

(0.31

)

$

(0.33

)

Basic and diluted (loss) income per share

 

$

(0.29

)

$

1.27

 

$

(0.35

)

$

0.45

 

$

0.40

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares (basic and diluted)

 

34,263

 

33,307

 

32,859

 

32,820

 

32,784

 

 

 

 

At December 31,

 

(in thousands)

 

2014

 

2013

 

2012

 

2011

 

2010

 

 

 

(Restated)

 

 

 

 

 

 

 

 

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Cash and investment securities

 

$

50,104

 

$

59,010

 

$

34,092

 

$

47,391

 

$

67,608

 

Working capital(1)

 

77,096

 

73,420

 

33,275

 

43,195

 

27,423

 

Total assets

 

88,450

 

92,201

 

41,693

 

54,337

 

77,784

 

Long-term liabilities

 

3,589

 

355

 

531

 

430

 

3,798

 

Accumulated deficit

 

(211,620

)

(201,650

)

(244,110

)

(232,525

)

(247,219

)

Total stockholders’ equity

 

75,681

 

81,053

 

35,172

 

45,620

 

27,457

 

 


(1)          Working capital is computed as the excess of current assets over current liabilities.

 

33



Table of Contents

 

The effect of the Restatement of the Company’s selected financial data are as follows:

 

 

 

Year ended December 31, 2014

 

 

 

Previously
Reported

 

Adjustments

 

Restated

 

 

 

(In thousands, except per share data)

 

Operating data:

 

 

 

 

 

 

 

Product revenue

 

$

59,867

 

$

(9,032

)

$

50,835

 

Cost of product revenue

 

13,171

 

(3,285

)

9,886

 

Gross profit

 

46,696

 

(5,747

)

40,949

 

Operating expenses

 

44,978

 

2,955

 

47,933

 

Other (expense) income

 

(1,771

)

 

(1,771

)

Income taxes (expense) benefit

 

(193

)

96

 

(97

)

Net (loss) income from continuing operations

 

(246

)

(8,606

)

(8,852

)

Net (loss) income from discontinued operations

 

(1,543

)

425

 

(1,118

)

Net (loss) income

 

$

(1,789

)

$

(8,181

)

$

(9,970

)

 

 

 

 

 

 

 

Basic net (loss) income per share from continuing operations

 

$

(0.01

)

$

(0.25

)

$

(0.26

)

Basic and diluted net (loss) income per share

 

$

(0.05

)

$

(0.24

)

$

(0.29

)

 

 

 

Year ended December 31, 2014

 

 

 

Previously
Reported

 

Adjustments

 

Restated

 

 

 

(In thousands)

 

Balance Sheet Data:

 

 

 

 

 

 

 

Cash and investment securities

 

$

50,104

 

$

 

$

50,104

 

Working capital

 

85,370

 

(8,274

)

77,096

 

Total assets

 

98,118

 

(9,668

)

88,450

 

Long-term liabilities

 

3,589

 

 

3,589

 

Accumulated deficit

 

(203,543

)

(8,077

)

(211,620

)

Total stockholders’ equity

 

83,963

 

(8,282

)

75,681

 

 


(1)          Working capital is computed as the excess of current assets over current liabilities.

 

ITEM 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

When reviewing the discussion below, you should keep in mind the substantial risks and uncertainties that characterize our business. In particular, we encourage you to review the risks and uncertainties described under “Risk Factors” included as Item 1A in this Form 10-K/A. These risks and uncertainties could cause actual results to differ materially from those forecasted in forward-looking statements or implied by past results and trends. Forward-looking statements are statements that attempt to project or anticipate future developments in our business; we encourage you to review the examples of forward-looking statements included in this Form 10-K/A under the heading “Cautionary Statements About Forward-Looking Information” above.

 

The accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) gives effect to the Restatement.  For additional information on the restatement, see Note 2 in the Company’s financial statements included in Part II, Item 8 of this Form 10-K/A.

 

The following is a discussion and analysis of our financial condition, results of operations, liquidity and capital resources for each of the three years ended December 31, 2014, 2013 and 2012 and significant factors that could affect our prospective financial condition and results of operations. You should read this discussion together with our financial statements and notes included in Part II, Item 8, “Financial Statements and Supplementary Data”, of this Form 10-K/A.

 

In October 2013, we sold our Therapeutics segment for up to $100 million in initial and contingent consideration and we are now focused on developing and commercializing our Biosurgery business. As a result of this sale, we eliminated our Therapeutics segment from our continuing operations and we have presented the assets, liabilities and results of this segment’s operations as discontinued operations for all periods. The following discussion of our financial condition and

 

34



Table of Contents

 

results of operations excludes the results of our discontinued operations unless otherwise noted. See Note 3, “Discontinued Operations” in the accompanying financial statements for further discussion of these discontinued operations.

 

Business Overview

 

Osiris Therapeutics, Inc., based in Columbia, Maryland, is a world leader in researching, developing and marketing cellular regenerative medicine products that improve the health and lives of patients, and lower overall healthcare costs. We continue to advance our R&D in biotechnology by focusing on innovation in regenerative medicine—including bioengineering, stem cell research and viable tissue-based products. We have achieved commercial success with products in orthopedics, sports medicine and wound care, including Ovation®, OvationOS® (now the subject of exclusive distribution rights held by Stryker under the brand BIO 4™ ), Cartiform® and Grafix®.

 

We began operations on December 23, 1992 and were a Delaware corporation until, with the approval of our stockholders, we reincorporated as a Maryland corporation on May 31, 2010.

 

From May 2010 to October 2013, we operated as two business segments, Therapeutics and Biosurgery. Our Therapeutics business focused on developing biologic stem cell drug candidates from a readily available and non-controversial source—adult bone marrow. Our Biosurgery business, created in 2009, works to harness the ability of cells and novel constructs to promote the body’s natural healing with the goals of improving surgical outcomes and offering better treatment options for patients and physicians.

 

In October 2013, we sold our Therapeutics business, including Prochymal and related assets, to a wholly-owned subsidiary of Mesoblast Limited, in a transaction worth up to $100 million plus royalties. The agreement with Mesoblast provides for the receipt by us of $50 million in initial consideration at closing and delivery of the assets, and for up to an additional $50 million in payments, but only upon Mesoblast achieving certain clinical and regulatory milestones. In addition, we are entitled to earn single to low double-digit cash royalties on future sales by Mesoblast of Prochymal and other products utilizing the acquired technology. Mesoblast has assumed all future development costs and efforts. As of December 31, 2013, of the $50 million in initial consideration, we had received $35 million, comprised of $20 million in cash and $15 million of Mesoblast Limited stock. We received the remainder of the initial consideration, $15 million in cash, in April 2014. The Mesoblast Limited stock was subject to a holding period which was ultimately extended to May 2015. During this holding period, Mesoblast Limited provided the Company limited protection against a decline in the market value of the stock. In May 2015, concurrent with expiration of holding period, Mesoblast Limited paid the Company $6.2 million representing the decline in the market value of the stock through that date. Later in 2015, the Company sold all of its Mesoblast Limited shares for $6.5 million. A $2.3 million loss was recognized in 2015 in connection with these transactions.

 

In December 2014, the Company executed commercial partnership agreements with the Orthopedics Unit with Stryker and the Sports Medicine Unit of Arthrex for the distribution of BIO 4™  and Cartiform ® , respectively. Sales under these exclusive distribution arrangements commenced in 2015.

 

In September 2013, the Company received an “untitled letter” from the FDA regarding the qualification of its Ovation® and Grafix® products as HCT/Ps (human cells, tissues, and cellular and tissue-based products). In October 2013, the Company reached agreement with the FDA to cease its production and sale of Ovation® and the FDA confirmed the continuing status of Grafix® as a HCT/P regulated under section 361 of the Public Health Services Act. In addition, the Company announced plans to submit a BLA covering expanded indications for Grafix®.  A clinical trial supporting the BLA began in 2015 with a target enrollment of 224 patients. In October 2016, the Company announced plans to terminate further enrollment in the trial and complete treatment of the 53 patients then enrolled. The decision to terminate further enrollment in the trial reflects the Company’s desire to allocate more of its research and development resources to other clincial programs, including its new cellular drug platform technology.

 

Production of Ovation® was discontinued in the third quarter of 2014 and the Company sold or shipped to consignees all of its remaining Ovation® inventory by the end of October 2014. As described further in Note 2 to the Company’s financial statements included in Part II, Item 8 of this Form 10-K/A, recognition of a substantial portion of these sales in 2014 are not recorded as revenue in 2014 but rather will be recorded as revenue in the period that payment is received. In the first quarter of 2014, the Company launched OvationOS® (rebranded as BIO 4™  in 2015) as a therapeutic substitute for Ovation® in many of clinical protocols to which Ovation® has historically been applied.

 

Since 2013, the Company has built a substantial direct sales force dedicated exclusively to the sale of Grafix®. As a result, Grafix® sales in 2014 were nearly five times that achieved in 2013. However, the contribution of Grafix® to the Company’s operating income has been limited due the heavy investment in sales and marketing. We operate in a competitive and challenging business environment and recognize that our execution of product development and market penetration

 

35



Table of Contents

 

strategy will face a number of challenges. As a result, we may experience variability in our overall results, and in our quarter to quarter revenue.

 

We are a fully integrated company, having developed capabilities in R&D, manufacturing, marketing and sales of stem cell products.

 

Restatement

 

All amounts set forth in this MD&A have been adjusted to reflect the Restatement.

 

Financial Operations Overview

 

Product Revenue

 

We manufacture human tissue-based products in our Columbia, Maryland facility. Commercial sales of our first placenta-based Biosurgery product, Grafix®, began in 2010. In 2011, we launched our second placenta-based Biosurgery product, Ovation®. In 2013, we launched the first of our two cadaver-based products, Cartiform®, followed in 2014 by OvationOS® (rebranded by Stryker as BIO 4™  in 2015).

 

The Company’s products are sold through its direct sales force as well as independent distributors. All of these products are cryopreserved and stored in special freezers at - 80 degrees Celsius. Our products are shipped to customers on dry ice in thermo-cooler boxes.

 

Some of our direct sales customers provide purchase orders in advance of our shipment and take title to our products as shipped, while others take title to our products only after the products have been implanted in their patients. Some of our direct sales customers purchase our products under a consignment sales arrangement and store our products on site in approved freezers, which are in most instances provided at no charge by our Company. Revenue is recognized upon shipment when a customer provides a purchase order in advance of shipment and in all other instances revenue is recognized when we receive notice that our product has been implanted.

 

Sales to and through distributors are made under various arrangements.

 

·                   Direct Sales Distributor - Distributor buys products from the Company and resells the products directly to end-use (clinical provider) customers at mark-up from its purchase cost: Revenue arising from direct sales arrangements with distributors is reported at the Company’s sales price to the distributor.

 

·                   Commissioned Sales Agent - Distributor serves as the Company’s commissioned sales agent, selling to end-use customers at agreed upon prices: Revenue arising from commissioned sales agent arrangements is reported at the sales price paid by the end-use customer and commissions paid to the distributor as a percentage of sales are reported as a sales expense.

 

·                   Government Contracting Agent — Company sells product under the government procurement contract of the contracting agent: Revenue arising from government contract sales arrangements is reported at the sales price paid by the end-use customer (primarily Veterans Administration hospitals) and service fees paid to the agent as a percentage of sales are reported as a sales expenses.

 

Cost of Product Revenue

 

All of the Company’s products are produced at its Columbia, Maryland headquarters facility. Cadaveric and placental tissue is purchased from independent tissue banks and processed in the Company’s production clean room. Other production costs include chemical solutions applied during the production process, packaging materials and quality control testing and quality assurance services.

 

Research and Development Costs

 

Our R&D costs consist of expenses incurred in identifying, developing and testing biologic tissue-based products and protecting the resulting intellectual property. These expenses consist primarily of salaries and related expenses for

 

36



Table of Contents

 

personnel, fees paid to professional service providers for independent monitoring and analysis of our clinical trials, costs of contract research, costs of facilities, and costs of manufacturing clinical trial materials, quality control supplies and the costs of filing, maintaining and defending patents designed to protect the Company’s intellectual property. Our historic R&D costs included these and other costs specific to our efforts focused on our biologic drug candidates, including costs of manufacture of clinical batches of our biologic drug candidates.

 

Consistent with our historic focus on the development of biologic drug candidates with potential uses in multiple indications, many of our historic costs are not attributable to a specifically identified product. We use our employee and infrastructure resources across several projects. Accordingly, we do not account for internal R&D costs on a project-by-project basis.

 

R&D expenses were $4.1 million in 2012, $4.3 million in 2013, and $3.4 million in 2014, which includes costs incurred for Protocol 302, which began during the second quarter of 2012 and was designed to allow for the collection of data necessary to obtain the permanent HCPCS Q-codes for Grafix®, which are required for Medicare and Medicaid reimbursement when treatment is performed in the outpatient setting. R&D expenses declined from 2013 to 2014 due to the completion of the Protocol 302 trials.

 

We expect our R&D expenses to continue to be substantial in the future, as we continue our clinical trial activity for our existing Biosurgery products if and as they advance through the development cycle, and if and as we invest in additional product opportunities and research programs. Clinical trials and preclinical studies are time-consuming and expensive. Our expenditures on current and future preclinical and clinical development programs are subject to many uncertainties. We test our products in several preclinical studies, and we then conduct clinical trials for those candidates that we determine to be the most promising. As we obtain results from clinical trials, we may elect to discontinue or delay trials for some product candidates in order to focus our resources on more promising product candidates. Completion of clinical trials may take several years or more, but the length of time generally varies substantially according to the type, size of trial and intended use of a product candidate. The cost of clinical trials may vary significantly over the life of a project as a result of a variety of factors, including:

 

·                   the number of patients who participate in the trials;

 

·                   the number of sites included in the trials;

 

·                   the length of time required to enroll trial participants;

 

·                   the duration of patient treatment and follow-up;

 

·                   the costs of producing supplies of the product candidates needed for clinical trials and regulatory submissions;

 

·                   the efficacy and safety profile of the product candidate; and

 

·                   the costs and timing of, and the ability to secure, regulatory approvals.

 

As a result of these uncertainties, we are unable to determine with any significant degree of certainty the duration and completion costs of our R&D projects or when and to what extent we will generate revenue from the commercialization and sale of any of our product candidates.

 

37



Table of Contents

 

Sales and Marketing Expenses

 

Sales and marketing expenses consist primarily of the costs of building, developing, training and maintaining our direct sales force and marketing teams including salaries, commissions and travel expenses as well as commissions and fees paid to our distributors and our federal contracting agent. The cost of establishing and maintaining reimbursement coverage for our products and advising our customers regarding reimbursement issues, together with regulatory oversight of our sales and marketing and distribution operations are also classified as sales and marketing expenses.

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of the costs associated with our general management, including salaries, allocations of facilities and related costs, and professional fees such as legal and accounting expenses. Bad debt arising from uncollectible trade accounts receivable are also classified as general and administrative expenses. We expect general and administrative expenses to increase as a result of hiring additional operational, financial, accounting, facilities engineering and information systems personnel as the scope our business activities grows. We did not experience any significant reductions in our general and administrative expenses as the result of the sale of our Therapeutics business.

 

Other Income (Expense), Net

 

Other income consists of interest earned on our cash and investments available for sale and realized gains and losses incurred on the sale of these investments. Interest expense consists of interest incurred on capital leases. We do not expect to incur material interest expense in the future as we do not have a material amount of equipment under capital lease or any outstanding debt.

 

Income Taxes

 

The total tax provision for 2014 is a combination of $97,000 from continuing operations and $516,000 from the portion of the proceeds from the sale of discontinued operations received in 2014, which is reflected as a component of discontinued operations. The tax expense from continuing operations is due to federal alternative minimum taxes and state taxes.

 

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 December 31, 2013 and 2014, which relate primarily to net operating loss and various business tax credit carryforwards. In the event that we become profitable, we have general business credits (before a 100% valuation allowance) of approximately $71.1 million that may be utilized to reduce our federal tax but not below the alternative minimum tax threshold. In addition, windfall equity-based compensation deductions in the amount of $5.4 million are tracked but not recorded to the balance sheet until they reduce income taxes payable on a with-and-without basis.

 

The total tax provision for 2013 is a combination of the income tax benefit of $994,000 from continuing operations and the gain from sale of discontinued operations, which is reflected net of income taxes of $1.3 million. The tax provision for 2013 reflects an effective tax rate benefit for continuing operations of 64.4% and was greater than the U.S. statutory tax rate of 35% due primarily to the tax benefit from disqualifying dispositions of incentive stock options (excluding windfall tax benefits). The Company was also subject to the alternative minimum tax of $388,000 in 2013, which was included in the income taxes allocated to the gain from the sale of discontinued operations.

 

In October 2013, we entered into an agreement with a wholly owned subsidiary of Mesoblast Limited for the sale of our ceMSC business, including Prochymal, in a transaction valued up to $100 million. Of the $50 million in initial consideration, $20 million was paid in cash and $15 million was paid in shares of Mesoblast Limited stock, prior to the close of 2013. The remaining $15 million payment was received in April 2014. The $50 million in initial consideration was recognized for financial statement reporting purposes and reported as a $49.4 million gain from sale of discontinued operations. For income tax purposes, the $35 million received was recognized in 2013 and the balance of the initial consideration of $15 million was recognized in 2014 for income tax purposes. The tax effect of the $15 million consideration received in 2014 was reported as a deferred tax liability in the amount of $6.1 million in 2013. This deferred payment also required that interest be accrued in the amount of $103,000 that increased the income taxes payable in 2013.

 

Amended income tax returns were filed for years 2010, 2011 and 2012 to reverse the calculation of the Orphan Drug Tax Credit taken in those years and increase the net operating loss carryforwards which will be utilized to offset the gain generated from sale of discontinued operations. The amended 2010 federal income tax return will generate an income tax

 

38



Table of Contents

 

recovery in the amount of $79,000. The inventory of deferred tax assets has been updated for these income tax amendments. Those refunds were received in 2014.

 

In 2012, we recognized an income tax benefit of $37,000 from continuing operations, in connection with truing up our tax asset accounts in connection with the filing of our 2011 income tax returns and the impact of the restatement as discussed in Note 2 to the Company’s financial statements included in Part II, Item 8 of this Form 10-K/A.

 

Critical Accounting Policies

 

General

 

Our discussion and analysis of our financial condition and results of operations are based on our financial statements, which we have prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, inventory valuation, derivative valuation, fair value accounting, deferred tax assets, share-based compensation, and contingencies. We base our estimates on historical experience and on various other assumptions that we believe are reasonable. These results form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

We believe that the following critical accounting policies reflect our more significant judgments and estimates used in the preparation of our financial statements.

 

Revenue Recognition

 

In 2010 we began operations of our Biosurgery business as a separate business segment, focused on developing high-end biologic products for use in wound healing and surgical procedures. We commenced production of our first Biosurgery segment product, Grafix®, a regenerative wound care product, during the first quarter of 2010. We launched the product for limited commercial distribution during the third quarter of 2010. We began distribution of another Biosurgery product, Ovation®, in early 2011. During 2013, we launched Cartiform®, a viable cartilage mesh for cartilage repair and in 2014 we introduced OvationOS® (rebranded by Stryker as BIO 4™  in 2015) a viable bone matrix. We recognized revenue of $50.8 million, $25.7 million and $7.2 million on sales of our Biosurgery products in 2014, 2013 and 2012, respectively.

 

We recognize revenue from the sales of our products when title and the risk of loss pass to the customer; when persuasive evidence of an arrangement exists; when sales amounts are fixed and determinable; and when collectability is reasonably assured. Due to the nature of the products and the manufacturing process, we generally do not allow sales returns or refunds unless the product is returned in the original shipping container and is determined to be salable.

 

For sales generated by our direct sales force, we recognize revenue upon shipment of our products to end-use customers (clinical providers), provided the customer has provided a purchase order or other documentation evidencing acceptance of the risks of ownership in advance of shipment. For products shipped before the customer has accepted the risks of ownership, we recognize revenue upon receipt of notice that our product has been used (implanted). Prior to receipt of such notice, the cost of products shipped is classified as consignment inventory.

 

We also sell our products through our distributors.  Some of our distributors act as principals and sell products purchased from us to their clinical provider customers at a marked-up price. Revenue from sales to such distributors is reported at our selling price to the distributor. Other distributors act as commissioned sales agent for the Company. Revenue from sales to such distributors are reported at the price paid by the clinical provider. Revenue from distributor sales is recognized upon shipment if risk of ownership passes to the distributor at that time, or upon receipt of notice of product use if risk of ownership passes only upon clinical use of the product. Prior to receipt of such notice, the cost of products shipped is classified as consignment inventory.

 

39



Table of Contents

 

In certain circumstances, our distributors and/or their clinical end-use customers may require the Company to maintain consignment inventory at their locations. For inventory held at consignment locations, no revenue is recognized as we retain title and maintain the inventory on our balance sheet.  We recognize revenue when we receive notification from the distributor that the consigned product has been used (implanted) or when a purchase order for the consigned product has been received from the distributor’s end-use customer for which, at that point, the title and risk of loss has passed to the customer. As of December 31, 2014 consigned inventory was valued at $1.8 million, of which $1.3 million was held by distributors and $0.5 million held by end-use customers.

 

Investments Available for Sale and Other Comprehensive Income

 

Investments available for sale consist primarily of marketable securities with maturities less than one year. Investments available for sale are valued at their fair value, with unrealized gains and losses reported as a separate component of stockholders’ equity in accumulated other comprehensive income. All realized gains and losses on our investments available for sale are recognized in results of operations as investment income, a component of “Other income (expense), net” in the accompanying financial statements.

 

Investments available for sale are evaluated periodically to determine whether a decline in their value is “other than temporary.” Management reviews criteria such as the magnitude and duration of the decline, as well as the reasons for the decline, to predict whether the loss in value is other than temporary. If a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.

 

Trading Securities

 

The Mesoblast Limited ordinary shares the Company received as initial consideration for the sale of its Therapeutics business are classified as Trading Securities on our balance sheets as of December 31, 2014 and 2013 since it is our intention to sell such securities following expiration of the agreed upon holding period.  These shares were sold for $6.5 million in the second half of 2015. In addition, Mesoblast Limited paid the Company $6.2 million in May 2015, representing the decline in the market value of the shares from the date received through the expiration of the holding period during which Mesoblast had agreed to provide the Company protection against a decline in the market value of such shares.

 

Trade Accounts Receivable

 

Accounts receivable has grown as a result of our revenue increasing from $7.5 million in the fourth quarter of 2013 to $15.1 million in the fourth quarter of 2014 and slower collections. Trade accounts receivable are reported at the Company’s estimate of their net realizable value. We charge off uncollectible receivables when the likelihood of collection is remote. We set credit terms with individual customers and consider receivables outstanding longer than the time specified in the respective customer’s contract to be past due. As of December 31, 2014 and 2013, trade accounts receivable in the accompanying balance sheets are reported net of an allowance for doubtful accounts of $1.7 million and $78,000, respectively. We incurred bad debt expense of $1.6 million, $80,000, and $22,000 during 2014, 2013 and 2012, respectively.

 

Inventory

 

We commenced limited distribution of our Biosurgery products during the third quarter of 2010, and began carrying inventory on our balance sheet thereafter. Inventory consists of raw materials, biologic products in process, product quarantined pending clearance by quality assurance and released products available for sale. We determine our inventory values using the first-in, first-out method. Inventory is valued at the lower of standard cost or market.

 

As discussed further in Note 2 to the Company’s financial statements included in Part II, Item 8 of this Form 10-K/A, the Company’s 2014 financial statements have been restated to correct errors in the valuation of inventory. Such errors include computation errors in the valuation of the Company’s finished goods inventory; inaccurate unit cost calculations of the Company’s finished goods inventory resulting from the use of non-current cost information; non-timely identification and write-off of known unsalable finished goods inventory as determined by the Company’s quality assurance procedures; the need for a reserve for consigned finished goods inventory due to inadequate monitoring of the ultimate disposition of consigned product; and the need for a reserve for work-in-process inventory which largely consists of product in quarantine pending the completion of the Company’s quality assurance procedures which results in a reasonably consistent identification of a portion of the product as unsalable.

 

40



Table of Contents

 

Valuation of Long-lived Assets

 

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be fully recoverable. These events or changes in circumstances may include a significant deterioration of operating results, changes in business plans, or changes in anticipated future cash flows. If an impairment indicator is present, we evaluate recoverability by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. Assets are grouped at the lowest level for which there is identifiable cash flows that are largely independent of the cash flows generated by other asset groups. If the total of the expected undiscounted future cash flows is less than the carrying amount of the asset, an impairment loss is recognized for the difference between the fair value and carrying value of assets. Fair value is generally determined by estimates of discounted cash flows. The discount rate used in any estimate of discounted cash flows would be the rate required for a similar investment of like risk. There were no impairment losses recognized during the years 2014, 2013 or 2012.

 

Discontinued Operations

 

We report the results of our discontinued operations separately from the results of our continuing operations below the income (loss) from continuing operations on the Statements of Comprehensive (Loss) Income. Cash flows from discontinued operations are also reported separately in the operating activities section of the Statements of Cash Flows. The Balance Sheets include separate line items for current assets and liabilities associated with discontinued operations.

 

Derivative Accounting

 

We account for derivative financial instruments under Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging. We do not trade derivative instruments as a part of our normal continuing operations. We held a derivative instrument for the price protection of the value of the Mesoblast Limited stock held from falling below $15.0 million for a one year period, which was included in trading securities on the balance sheet as of December 31, 2013. The fair value of the price protection instrument was $1.7 million at December 31, 2013. The price protection ended in December 2014 and, therefore, as of December 31, 2014, we no longer had a derivative instrument.

 

Fair Value Accounting

 

We report the value of our financial assets under ASC 825, Financial Instruments, at fair value in the accompanying financial statements. 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.

 

Research and Development Costs

 

We expense internal and external R&D costs in the period incurred.

 

R&D expenses were $3.4 million, $4.3 million, and $4.1 million, in 2014, 2013 and 2012 respectively, which includes costs incurred for Protocol 302 designed to allow for the collection of data necessary to obtain the permanent HCPCS Q-codes that began during the second fiscal quarter of 2012.

 

Income Taxes

 

Deferred tax liabilities and assets are recognized for the estimated future tax consequences of temporary differences, income tax credits and net operating loss carryforwards. Temporary differences are primarily the result of the differences between the tax bases of assets and liabilities and their financial reporting values. Deferred tax liabilities and assets are measured by applying the enacted statutory tax rates applicable to the future years in which deferred tax liabilities or assets are expected to be settled or realized. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense, if any, consists of the taxes payable for the current period and the change during the period in deferred tax assets and liabilities.

 

41



Table of Contents

 

We recognize in our financial statements the impact of a tax position, if that position is more likely than not to be sustained upon an examination, based on the technical merits of the position. Interest and penalties related to income tax matters are recorded as income tax expense. At December 31, 2014 and 2013, we had no accruals for interest or penalties related to income tax matters.

 

Share-Based Compensation

 

We account for share-based payments using the fair value method.

 

We recognize all share-based payments to employees and non-employee directors in our financial statements based on their grant date fair values, calculated using the Black-Scholes option pricing model. Compensation expense related to share-based awards is recognized on a straight-line basis based on the value of share awards that are expected to vest during the requisite service period on the grant date, which is revised for forfeitures.

 

Income per Common Share

 

Basic income per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted income per common share adjusts basic income 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 and warrants.

 

Diluted loss from continuing operations for the year ended December 31, 2014 excludes all 1,608,557 shares issuable upon the exercise of options, as their impact on our loss from continuing operations is anti-dilutive. As a result, basic and diluted weighted average common shares outstanding are identical.

 

Diluted loss from continuing operations for the year ended December 31, 2013 excludes all 1,233,767 shares issuable upon the exercise of options, as their impact on our loss from continuing operations is anti-dilutive. As a result, basic and diluted weighted average common shares outstanding are identical.

 

Diluted loss per common share for the year ended December 31, 2012 excludes the 1,000,000 shares issuable upon the exercise of an outstanding “out-of the money” warrant, and all 1,826,114 of our outstanding options as of December 31, 2012, as their impact on our net loss is anti-dilutive. As a result, basic and diluted weighted average common shares outstanding are identical.

 

42



Table of Contents

 

 

Results of Operations

 

The following tables of selected financial data of the Company have been prepared in accordance with GAAP:

 

 

 

 

Year ended December 31,

 

(in thousands)

 

2014

 

2013

 

2012

 

 

 

(Restated)

 

 

 

 

 

Product revenue

 

$

50,835

 

$

25,698

 

$

7,164

 

Cost of product revenue

 

9,886

 

6,851

 

2,420

 

Gross profit

 

40,949

 

18,847

 

4,744

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

3,414

 

4,330

 

4,059

 

Sales and marketing

 

36,384

 

13,810

 

2,836

 

General and administrative

 

7,563

 

2,538

 

2,282

 

Related parties

 

572

 

180

 

1,920

 

Total operating expenses

 

47,933

 

20,858

 

11,097

 

Loss from operations

 

(6,984

)

(2,011

)

(6,353

)

Other (expense) income, net

 

(1,771

)

414

 

49

 

Loss from continuing operations, before income taxes

 

(8,775

)

(1,597

)

(6,304

)

Income tax (expense) benefit

 

(97

)

994

 

37

 

Loss from continuing operations

 

(8,852

)

(603

)

(6,267

)

(Loss) income from discontinued operations

 

(1,118

)

43,063

 

(5,318

)

Net (loss) income

 

$

(9,970

)

$

42,460

 

$

(11,585

)

 

Year ended December 31, 2014 compared to December 31, 2013 and December 31, 2012

 

 

 

Year Ended December 31,

 

 

 

2014

 

2013

 

2012

 

% Change

 

Product

 

Product
Revenue

 

Percent of
 Total

 

Product
Revenue

 

Percent of
 Total

 

Product
Revenue

 

Percent of
 Total

 

14 vs 13

 

13 vs 12

 

 

 

(Restated)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grafix

 

$

36,069

 

71.0

%

$

8,154

 

31.7

%

$

2,572

 

35.9

%

342.3

%

217.0

%

Ovation

 

12,370

 

24.3

%

16,694

 

65.0

%

4,592

 

64.1

%

(25.9

)%

263.5

%

Other

 

2,396

 

4.7

%

850

 

3.3

%

 

%

181.9

%

%

Total

 

$

50,835

 

100.0

%

$

25,698

 

100.0

%

$

7,164

 

100.0

%

97.8

%

258.7

%

 

Product Revenue and Gross Profit

 

Product revenue recognized in 2014 was more than double that realized in 2013, reflecting the ramp-up of the Company’s direct sales force and the rapid expansion of reimbursement coverage for our Grafix® product. Grafix® is sold primarily through our direct sales force, while Ovation® and our other products are sold through our distributor network. Revenue from sale of Ovation® declined 25.9% from 2013 to 2014. The decline in revenue from the sale of Ovation® was primarily due to the timing of revenue recognition of several transactions initiated in 2014 which did not meet the applicable revenue recognition criteria in the period. As described in Note 2 to the Company’s financial statements included in Part II, Item 8 of this Form 10-K/A, Ovation® sales were adversely impacted in 2014 by the reversal of approximately $10.3 million of previously reported revenue arising from distributor sales arrangements under which the Company had granted three distributors unusually long payment terms. GAAP requires the recognition of revenue when the customer payment is received if unusually long payment terms are offered. Customer payments aggregating $8.1 million and $1.2 million were received in 2015 and 2016, respectively, on distributor sales transactions for which revenue was reversed in 2014, which will be recognized as revenue in the year payment was received.

 

The Company agreed to end its production and sale of Ovation® as part of its previously announced agreement with the FDA.  The Company discontinued its production of Ovation® in the third quarter of 2014, and shipped its remaining Ovation® inventory to distributors or consignees in the fourth quarter of 2014.

 

Our gross profit margin increased in 2014 to 80.6% compared to 73.3% in 2013, primarily as the result of operational efficiencies gained as we increased the utilization of our production facilities.

 

43



Table of Contents

 

Research and Development Expenses

 

R&D expenses in 2014 were $3.4 million compared to $4.3 million in 2013. Just over half of our 2013 R&D spending was related to Protocol 302 to evaluate the efficacy of Grafix® compared to the standard of care in the treatment of diabetic foot ulcers. The remaining 2013 R&D costs were spent on both new product development and product improvements. These efforts resulted in the introduction of OvationOS® (rebranded by Stryker as BIO(4)™ in 2015)  and Cartiform®, and in novel packaging and application improvements to our Grafix® product line. R&D expenses declined in 2014, primarily due to the completion of Protocol 302 in the first quarter of 2014. While no new clinical trials were started in 2014, the Company continued R&D work focused on the expansion of Grafix to venous leg ulcers and other clinical applications. The Company is also developing new placenta-based products as well as new product platforms.

 

Sales and Marketing Expenses

 

Sales and marketing expenses increased to $36.4 million in 2014 from $13.8 million in 2013, primarily due to the increase in our Grafix® sales force from 10 at the end of 2013 to approximately 100 at the end of 2014. Compensation of our sales force, including sales-based commissions, increased commensurate with these additions to our sales force and the $28 million increase in Grafix® sales. We also expanded our market access and reimbursement group in 2014 and opened a reimbursement hotline for our customers. As a result, health insurance coverage available to patients using our Grafix® product expanded from 100 million at December 31, 2013 to 200 million at December 31, 2014.

 

General and Administrative Expenses

 

General and administrative expenses increased to $7.6 million during 2014 compared to $2.5 million in 2013. This increase was primarily due to the hiring of addition personnel required to support the Company’s rapidly expanding operations. The $1.6 million increase in our bad debt reserve was also a major contributor to the growth of the Company’s general and administrative expenses. A substantial portion of general and administrative expenses incurred in 2013 were allocated to discontinued operations.

 

Other Income (Expense), net

 

Other expense, net in 2014 was $1.8 million compared to other income, net of $414,000 million in 2013. Other expense, net in 2014 was comprised of a $401,000 unrealized loss on the decline in the market value of Mesoblast Limited stock we received in connection with the sale of our Therapeutics business and $1.7 million loss on the price protection, offset  by $400,000 million of net investment income earned on our investments available for sale. We carry the Mesoblast Limited stock as trading securities on the balance sheets as of December 31, 2014 and 2013. Other income, net in 2013 was comprised principally of a $400,000 million of unrealized gain on the increase in the market value of Mesoblast Limited stock.

 

Income Taxes

 

The total tax provision for 2014 is a combination of $97,000 from continuing operations and $516,000 from the portion of the proceeds from the sale of discontinued operations received in 2014, which is reflected as a component of discontinued operations in the accompanying financial statements. The tax expense from continuing operations is due to federal alternative minimum taxes and state taxes.

 

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 December 31, 2013 and 2014, which relate primarily to net operating loss and various business tax credit carryforwards. In the event that we become profitable, we have general business credits (before a 100% valuation allowance) of approximately $71.1 million that may be utilized to reduce our federal tax but not below the alternative minimum tax threshold. In addition, windfall equity based compensation deductions in the amount of $5.4 million are tracked but not recorded to the balance sheets until they are reduce income taxes payable on a with-and-without basis.

 

The total tax provision for 2013 is a combination of the income tax benefit of $994,000 from continuing operations and the gain from sale of discontinued operations, which is reflected net of income taxes of $1.3 million. The tax provision for 2013 reflected an effective tax rate benefit for continuing operations of 64.4% and was greater than the U.S. statutory tax rate of 35%, due primarily to the tax benefit from disqualifying dispositions of incentive stock options (excluding windfall tax benefits). We were also subject to the alternative minimum tax of $388,000 in 2013, arising from the sale of discontinued operations.

 

44



Table of Contents

 

In October 2013, we entered into an agreement with a wholly owned subsidiary of Mesoblast Limited for the sale of our ceMSC business, including Prochymal, in a transaction valued up to $100 million. Of the $50 million in initial consideration, $20 million was paid in cash and $15 million was paid in shares of Mesoblast Limited stock, prior to the close of 2013. The remaining $15 million payment was received in April 2014. The $50 million in initial consideration was recognized for financial statement reporting purposes and reported as a $49.4 million gain from sale of discontinued operations. For income tax purposes, the $35 million received was recognized in 2013 and the balance of the initial consideration of $15 million was recognized in 2014 for income tax purposes. The tax effect of the $15 million consideration received in 2014 was reported as a deferred tax liability in the amount of $6.1 million in 2013. This deferred payment also required that interest be accrued in the amount of $103,000 that increased the income taxes payable in 2013.

 

Amended income tax returns were filed for years 2010, 2011 and 2012 to reverse the calculation of the Orphan Drug Tax Credit taken in those years and increase the net operating loss carryforwards which will be utilized to offset the gain generated from sale of discontinued operations. The amended 2010 federal income tax return will generate income tax recoverable in the amount of $79,000. We have recorded a full valuation allowance against our net deferred tax assets as of December 31, 2014 and 2013. The inventory of deferred tax assets has been updated for these income tax amendments. Such refunds were received in 2014.

 

In 2012, we recognized an income tax benefit of $37,000 from continuing operations, in connection with truing up our tax asset accounts in connection with the filing of our 2011 income tax returns.

 

Fees Paid to Related Parties, Including Share-Based Payments

 

In 2014 and 2013, we compensated non-employee members of our Board of Directors by grants of stock ranging from 2,500 to 10,000 shares annually, and we permit the directors to take their payments in either cash or stock or a combination thereof. During 2014, our non-employee directors were awarded the value of 35,000 shares of our common stock which had a fair market value of $14.93 per share. This was paid with $119,400 of cash and 27,000 shares of stock valued at $403,100. During 2013, our non-employee directors were awarded the value of 31,250 shares of our common stock which had a fair market value of $7.73 per share. This was paid with $62,000 of cash and 23,250 shares of stock valued at $180,000.

 

Year ended December 31, 2013 compared to December 31, 2012

 

Product Revenue and Gross Profit

 

Product revenue recognized in 2013 was more than three times that realized in 2012. Our sales growth leader was Ovation® which gained commercial traction in 2013.  Grafix® also achieved a high rate of sales growth reflecting the launch of our direct sales force and progress in obtaining reimbursement coverage.

 

Our gross profit increased in 2013 to 73.3% compared to 66.2% in 2012, primarily as the result of operational efficiencies as we more heavily utilized our production facilities.

 

Research and Development Expenses

 

R&D expenses in 2013 were $4.3 million compared to $4.1 million in 2012. A little over half of our 2013 R&D spending was related to Protocol 302 to evaluate the efficacy of Grafix® compared to the standard of care in the treatment of diabetic foot ulcers. The remaining R&D costs were spent on both new product development and product improvements. These efforts resulted in the introduction of OvationOS® (rebranded by Stryker as BIO(4)™ in 2015) and Cartiform®, and in novel packaging and application improvements to our Grafix® product line. In 2012, the Company’s R&D efforts were directed primarily to improving processes applied in the manufacturing and packaging of existing products and the enrollment of patients in clinical trials required to obtain cost reimbursement for Grafix®.

 

45



Table of Contents

 

Sales and Marketing Expenses

 

Sales and marketing expenses increased to $13.8 million during 2013 as compared to $2.8 million in 2012.  This increase was due to additional sales commissions paid to the Company’s distributors commensurate with the growth of the Company’s revenue. We also made a substantial investment in our marketing and reimbursement infrastructure which was essential to increasing the Company’s exposure to the nation’s public and private health care providers and insurers. During 2013, we launched our own in-house direct sales force, primarily for Grafix®, and invested in training and more extensive product support capabilities.

 

General and Administrative Expenses

 

General and administrative expenses increased to $2.5 million during 2013 compared to $2.3 million in 2012. This increase was primarily due to the hiring of addition personnel required to support the Company’s rapidly expanding operations. A substantial portion of the general and administrative expenses incurred in 2013 were allocated to discontinued operations.

 

Other Income (Expense), net

 

Other income, net in 2013 was comprised principally of $414,000 million of unrealized gain arising from the increase in the market value of the Mesoblast Limited stock we received in connection with the sale of our Therapeutics business. We carried the Mesoblast stock as trading securities. Other income, net in 2012 was comprised solely of the net investment gains on our investments available for sale.

 

Income Taxes

 

In 2013, we sold our Therapeutics business for initial consideration of $50 million, all of which was recognized for financial reporting purposes. The resulting gain from the sale of discontinued operations was substantially greater than the $2.4 million loss before income taxes that we reported on our operations of continuing operations and the loss from the operations of discontinued operations of $6.7 million. For income tax purposes, $35 million of the initial consideration was taxable in 2013, and the additional $15 million was taxable in 2014 when we received the payment.

 

The total tax provision for 2013 is a combination of the income tax benefit of $994,000 from continuing operations and the gain from sale of discontinued operations, which is reflected net of income taxes of $1.3 million. The tax provision for 2013 reflects an effective tax rate benefit for continuing operations of 64.4% and was greater than the U.S. statutory tax rate of 35% due primarily to the tax benefit from disqualifying dispositions of incentive stock options (excluding windfall tax benefits). We were also subject to the alternative minimum tax of $388,000, arising from the sale of discontinued operations.

 

In 2012, we recognized an income tax benefit of $37,000 from continuing operations, in connection with truing up our tax asset accounts in connection with the filing of our 2011 income tax returns.

 

We recorded a full valuation allowance against our net deferred tax assets as of December 31, 2013 and 2012.

 

Fees Paid to Related Parties, Including Share-Based Payments

 

In 2013 and 2012, we compensated non-employee members of our Board of Directors by grants of stock ranging from 2,500 to 10,000 shares annually, and we permitted the directors to take their payments in either cash or stock or a combination thereof. During 2013, our non-employee directors were awarded the value of 31,250 shares of our common stock which had a fair market value of $7.73 per share. This was paid with $62,000 of cash and 23,250 shares of stock valued at $180,000. During 2012, our non-employee directors were awarded the value of 30,000 shares of our common stock which had a fair market value of $5.08 per share. This was paid with $25,000 in cash and 25,000 shares of stock valued at $127,000.

 

Liquidity and Capital Resources

 

Liquidity

 

At December 31, 2014, we had $2.2 million in cash and $37.3 million in investments available for sale. Other receivables at December 31, 2014 included the $5.0 million initial payment from Stryker and the $4.4 million difference

 

46



Table of Contents

 

between the market value at December 31, 2014 of the Mesoblast Limited shares held by us and the $15 million Mesoblast Limited was then obligated pay the Company in the event we chose to sell such shares. As of December 31, 2014, the trading securities of $10.6 million consists of the fair value of the Mesoblast stock held by us.

 

As a result of the Restatement and related legal proceedings and government investigations, we have and will continue to incur significant legal, accounting and other professional fees, well beyond historical levels. We expect this trend to continue until these matters are resolved.

 

Cash Flow

 

The following table sets forth a summary of our cash flows for each of our three most recently completed fiscal years:

 

 

 

Years Ended December 31,

 

(In thousands)

 

2014

 

2013

 

2012

 

 

 

(Restated)

 

 

 

 

 

Net cash used in operating activities of continuing operations

 

$

(18,756

)

(3,309

)

$

(4,783

)

Net cash used in operating activities

 

(3,155

)

(13,601

)

(13,271

)

Net cash provided by investing activities

 

1,059

 

11,940

 

13,324

 

Net cash provided by financing activities

 

1,888

 

2,223

 

140

 

 

Net cash used in operating activities of continuing operations was $18.8 million during 2014, and primarily reflects our net loss of $8.9 million and net increases in our current assets partially offset by non-cash charges and increase in current liabilities.

 

Net cash used in operating activities of continuing operations during 2013 was $3.3 million, and primarily reflects our net loss of $603,000 and net increases in our trade receivables and inventory, partially offset by non-cash charges.

 

Net cash used in operating activities of continuing operations during 2012 was $4.8 million, and reflects our net loss of $6.3 million, partially offset by $1.1 of non-cash charges and net unfavorable changes in working capital.

 

Net cash provided by investing activities was $1.1 million, $11.9 million, and $13.3 million, respectively, during years 2014, 2013 and 2012, and in each year primarily reflects proceeds from the sales of our investments to fund our operations, as well as the proceeds from the sale of our Therapeutics business.

 

Net cash provided by financing activities was $1.9 million and $2.2 million in 2014 and 2013, respectively, and was insignificant in 2012. The 2014 cash provided by financing activities is primarily the net proceeds from the exercise of stock options by our employees to purchase our common stock.

 

The adjustments had an impact on certain captions within the condensed statements of cash flows for the restated quarterly periods as discussed further in Note 2 to the Company’s financial statements included in Part II, Item 8 of this Form 10-K/A.

 

Capital Resources

 

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

 

·                   the scope and results of our research and preclinical development programs;

 

·                   the scope and results of our clinical trials;

 

·                   the timing of and the costs involved in obtaining regulatory approvals for our biologic product candidates, which could be more lengthy or complex than obtaining approval for a new conventional drug, given the FDA’s limited experience with late-stage clinical trials and marketing approval for stem cell biologics;

 

·                   the costs of maintaining, expanding and protecting our intellectual property portfolio, including possible litigation costs and liabilities;

 

47



Table of Contents

 

·                   the costs of enlarging our work force consistent with expanding our business and operations and distribution of our Biosurgery products; and

 

·                   the costs incurred for professional fees and any legal liabilities related to the Restatement and related legal matters described under Part I, Item 3, “Legal Proceedings”.

 

Off-Balance Sheet Arrangements

 

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

 

Future Contractual Obligations

 

The following table sets forth our estimates as to the amounts and timing of contractual payments for our most significant contractual obligations at December 31, 2014. The information in the table reflects future unconditional payments and is based on the terms of the relevant agreements, appropriate classification of item under GAAP and certain assumptions. Future events could cause actual payments to differ from these amounts.

 

 

 

Payment Due by Fiscal Year

 

 

 

 

 

Less Than

 

 

 

 

 

More Than

 

Contractual Obligations 

 

Total

 

1-Year

 

Years 1-3

 

Years 4-5

 

5-Years

 

 

 

(amounts in thousands)

 

Operating lease—facilities

 

$

10,610

 

$

1,194

 

$

2,153

 

$

2,306

 

$

4,957

 

Capital lease obligations

 

120

 

48

 

72

 

 

 

Total contractual cash obligations

 

$

10,730

 

$

1,242

 

$

2,225

 

$

2,306

 

$

4,957

 

 

Contract Research Organizations.   We contract with independent contract research organizations (“CROs”), to perform many of the tasks required under our clinical trials, and we utilize their testing expertise to ensure the objectivity of the clinical results. Under the terms of these agreements, we design the protocol regarding the testing to be performed, and the CRO assists in the enrollment of the patients and testing sites, administers the trial, performs statistical analysis of the results, and compiles the final report.

 

We pay fees directly to the CROs for their professional services, which may be payable upon specified trial milestones or as they provide services, depending on the structure of the contract. We are also responsible for reimbursing the CROs for certain pass thru expenses they incur in administering the trial. The timing of our payments to the CROs is dependent upon the progress of the various trials, which is highly variable dependent upon the speed with which the CROs are able to enroll patients and testing sites. As such, we are unable to specifically predict the timing of future payments to CROs in connection with a specific clinical trial.

 

We have active contracts with a CRO related to on-going clinical trials. Although we cannot directly control the timing of the remaining payments, based on our estimates and assumptions as of February 27, 2015, we expect to pay approximately $10.7 million to the CRO between 2015 and 2017.

 

Leases.   During 2006, we entered into a sublease agreement for approximately 61,000 square feet of laboratory, production, warehouse and office space in Columbia, Maryland. We have also entered into a direct lease with the owner of this facility that was effective as of June 1, 2009 upon the expiration of the sublease and originally expired in July 2016. According to the terms of the lease agreement, we were required to provide a letter of credit which was fully collateralized by restricted cash and as of December 31, 2013, the letter of credit of $224,000 remained outstanding. In September 2014, we entered into an amendment to the operating lease for our Columbia, Maryland facilities, extending the term of the lease through October 2023 and increasing the future minimum lease commitment by $9.0 million. The lease amendment includes an allowance for tenant improvements of approximately $1.5 million that we expect to utilize in 2015 to expand our manufacturing facilities and adjust our office space to accommodate our additional employees. Under the amended lease agreement, we also replaced the $224,000 letter of credit with a $96,000 cash deposit and eliminated all restricted cash.

 

48



Table of Contents

 

Effect of Inflation

 

Inflation and changing prices are not generally a material factor affecting our business. General operating expenses such as salaries, employee benefits and lease costs are, however, subject to normal inflationary pressures.

 

49



Table of Contents

 

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

OSIRIS THERAPEUTICS, INC.

FINANCIAL STATEMENTS

INDEX

 

 

 

Page

Reports of Independent Registered Public Accounting Firm

 

51

Balance Sheets as of December 31, 2014 (restated) and 2013

 

53

Statements of Comprehensive Income (Loss) for the years ended December 31, 2014 (restated), 2013 and 2012

 

54

Statements of Changes in Stockholders’ Equity for the years ended December 31, 2014 (restated), 2013 and 2012

 

55

Statements of Cash Flows for the years ended December 31, 2014 (restated), 2013 and 2012

 

56

Notes to Financial Statements

 

57

 

FINANCIAL STATEMENT SCHEDULES

 

SCHEDULE II—Valuation and Qualifying Accounts

 

100

 


*                  All other information and financial statement schedules are omitted because they are not applicable, or required, or because the required information is included in the consolidated financial statements or notes thereto.

 

50



Table of Contents

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING F IRM

 

Board of Directors and Shareholders of

Osiris Therapeutics, Inc.

Columbia, Maryland

 

We have audited the accompanying balance sheets of Osiris Therapeutics, Inc. as of December 31, 2014 and 2013 and the related statements of comprehensive (loss) income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014.  In connection with the audits of the financial statements, we have also audited the financial statement schedule listed in the accompanying index.  These financial statements and schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Osiris Therapeutics, Inc. at December 31, 2014 and 2013, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.

 

Also, in our opinion, the financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

 

As discussed in Note 2 to the financial statements, the 2014 financial statements have been restated to correct certain misstatements.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Osiris Therapeutics, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 27, 2017 expressed an adverse opinion thereon.

 

 

/s/ BDO USA, LLP

 

 

McLean, Virginia

 

 

 

March 27, 2017

 

 

51



Table of Contents

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Stockholders

Osiris Therapeutics, Inc.

Columbia, Maryland

 

We have audited Osiris Therapeutics, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control —Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Osiris Therapeutics, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in “Management’s Report on Internal Control Over Financial Reporting” included in Item 9A of the accompanying report. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our report dated March 20, 2015, we expressed an unqualified opinion on the effectiveness of internal control over financial reporting as of December 31, 2014.  Subsequent to March 20, 2015, Osiris Therapeutics, Inc. identified material misstatements in its annual and quarterly financial statements for 2014, requiring restatement of such financial statements. Management revised its assessment of internal control over financial reporting due to the identification of material weaknesses in connection with the financial statement restatement. Accordingly, our opinion on the effectiveness of Osiris Therapeutic, Inc.’s internal control over financial reporting as of December 31, 2014 expressed herein is different from that expressed in our previous report.  A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. Material weaknesses have been identified and described in management’s assessment. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2014 financial statements (as restated).

 

In our opinion, Osiris Therapeutics, Inc. did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria.

 

We do not express an opinion or any other form of assurance on management’s statements referring to any corrective actions taken by the company after the date of management’s assessment.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets of Osiris Therapeutics, Inc. as of December 31, 2014 and 2013, and the related statements of comprehensive (loss) income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014, and our report dated March 27, 2017 expressed an unqualified opinion thereon.

 

 

/s/ BDO USA, LLP

 

 

McLean, Virginia

 

 

 

March 27, 2017

 

 

52



Table of Contents

 

OSIRIS THERAPEUTICS, INC.

BALANCE SHEETS

(amounts in thousands, except per share amounts)

 

 

 

December 31,

 

 

 

2014

 

2013

 

 

 

(Restated)

 

 

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash

 

$

2,208

 

$

2,416

 

Investments available for sale

 

37,305

 

39,508

 

Trading securities

 

10,591

 

17,086

 

Trade accounts receivable, net of reserves

 

13,373

 

7,459

 

Other receivables

 

10,081

 

15,369

 

Inventory

 

9,824

 

1,929

 

Prepaid expenses and other current assets

 

2,894

 

355

 

Current assets of discontinued operations

 

 

91

 

Total current assets

 

86,276

 

84,213

 

 

 

 

 

 

 

Property and equipment, net

 

2,079

 

1,896

 

Deferred tax asset

 

 

5,849

 

Restricted cash

 

 

243

 

Other assets

 

95

 

 

Total assets

 

$

88,450

 

$

92,201

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

Accounts payable and accrued expenses

 

$

7,468

 

$

4,842

 

Capital lease obligations, current portion

 

45

 

45

 

Deferred exclusivity fee revenue, current portion

 

1,667

 

 

Deferred tax liability

 

 

5,849

 

Current liabilities of discontinued operations

 

 

57

 

Total current liabilities

 

9,180

 

10,793

 

 

 

 

 

 

 

Other long-term liabilities

 

3,589

 

355

 

Total liabilities

 

12,769

 

11,148

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Common stock, $.001 par value, 90,000 shares authorized, 34,346 shares outstanding - 2014, 34,115 shares outstanding - 2013

 

35

 

34

 

Additional paid-in-capital

 

287,320

 

282,702

 

Accumulated other comprehensive loss

 

(54

)

(33

)

Accumulated deficit

 

(211,620

)

(201,650

)

Total stockholders’ equity

 

75,681

 

81,053

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

88,450

 

$

92,201

 

 

The accompanying notes are an integral part of these financial statements.

 

53



Table of Contents

 

OSIRIS THERAPEUTICS, INC

STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(amounts in thousands, except per share data)

 

 

 

Year ended December 31,

 

 

 

2014

 

2013

 

2012

 

 

 

(Restated)

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenue

 

$

50,835

 

$

25,698

 

$

7,164

 

Cost of product revenue

 

9,886

 

6,851

 

2,420

 

Gross profit

 

40,949

 

18,847

 

4,744

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

Research and development

 

3,414

 

4,330

 

4,059

 

Sales and marketing

 

36,384

 

13,810

 

2,836

 

General and administrative

 

7,563

 

2,538

 

2,282

 

Fees paid to related parties

 

169

 

 

2

 

Share-based payments to related parties

 

403

 

180

 

1,918

 

Total operating expenses

 

47,933

 

20,858

 

11,097

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

(6,984

)

(2,011

)

(6,353

)

 

 

 

 

 

 

 

 

Other (expense) income, net

 

(1,771

)

414

 

49

 

 

 

 

 

 

 

 

 

Loss from continuing operations, before income taxes

 

(8,775

)

(1,597

)

(6,304

)

 

 

 

 

 

 

 

 

Income tax (expense) benefit

 

(97

)

994

 

37

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

(8,852

)

(603

)

(6,267

)

 

 

 

 

 

 

 

 

Discontinued operations

 

 

 

 

 

 

 

Loss from operations of discontinued operations, net of income taxes of $516 in 2014, $0 in 2013, and $0 in 2012

 

(1,118

)

(6,668

)

(5,318

)

Gain from sale of discontinued operations, net of income taxes of $1,374 in 2013

 

 

49,731

 

 

(Loss) income from discontinued operations

 

(1,118

)

43,063

 

(5,318

)

 

 

 

 

 

 

 

 

Net (loss) income

 

(9,970

)

42,460

 

(11,585

)

 

 

 

 

 

 

 

 

Other comprehensive loss

 

 

 

 

 

 

 

Unrealized loss on investments available for sale

 

(21

)

(13

)

(40

)

 

 

 

 

 

 

 

 

Comprehensive (loss) income

 

$

(9,991

)

$

42,447

 

$

(11,625

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted income (loss) per share

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(0.26

)

$

(0.02

)

$

(0.19

)

Income (loss) from discontinued operations

 

(0.03

)

1.29

 

(0.16

)

Basic income (loss) per share

 

$

(0.29

)

$

1.27

 

$

(0.35

)

 

 

 

 

 

 

 

 

Weighted average common shares (basic and diluted)

 

34,263

 

33,307

 

32,859

 

 

The accompanying notes are an integral part of these financial statements.

 

54



Table of Contents

 

OSIRIS THERAPEUTICS, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(amounts in thousands, except for share and per share data)

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

Total

 

 

 

Common Stock

 

Paid-in

 

Comprehensive

 

Accumulated

 

Stockholders’

 

 

 

Shares

 

Amount

 

Capital

 

(Loss) Income

 

Deficit

 

Equity

 

Balance at January 1, 2011

 

32,827,521

 

$

33

 

$

278,092

 

$

20

 

$

(232,327

)

$

45,818

 

Revision to prior period financial statements (see Note 2)

 

 

 

 

 

(198

)

(198

)

Balance at January 1, 2011 as revised

 

32,827,521

 

$

33

 

$

278,092

 

$

20

 

$

(232,525

)

$

45,620

 

Exercise of options to purchase common stock ($.40- $7.74 per share)

 

28,708

 

 

87

 

 

 

87

 

Share-based payment-director services ($5.08 per share)

 

25,000

 

 

127

 

 

 

127

 

Share-based payment-employee compensation

 

 

 

963

 

 

 

963

 

Net loss

 

 

 

 

 

(11,585

)

(11,585

)

Unrealized gain on investments available for sale

 

 

 

 

(40

)

 

(40

)

Balance at December 31, 2012

 

32,881,229

 

$

33

 

$

279,269

 

$

(20

)

$

(244,110

)

$

35,172

 

Exercise of options to purchase common stock ($.40- $22.74 per share)

 

642,514

 

 

2,193

 

 

 

2,193

 

Share-based payment-director services ($7.73 per share)

 

23,250

 

 

180

 

 

 

180

 

Net exercise of warrant to purchase common stock ($11.00 per share)

 

567,610

 

1

 

(1

)

 

 

 

Share-based payment-employee compensation

 

 

 

1,061