Filing identity and reporting period
Important mismatch: The supplied filing is NeoStem, Inc.’s Form 10-Q for the quarter ended June 30, 2013—not a Lisata Therapeutics filing or a 2012 second-quarter report. The summary below reflects the filing text provided.
NeoStem operated in cellular therapy, combining its PCT contract development and manufacturing services with development of cell therapy products. Its China operations had been exited or sold; the filing reports one segment, Cell Therapy. Financial statements are unaudited. Share and per-share amounts were retrospectively adjusted for the 1-for-10 reverse split effective July 16, 2013.
Financial performance and position
Amounts below are in U.S. dollars; figures are rounded to millions except per-share data.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $4.36m | $3.37m | $6.88m | $7.14m |
| Gross profit (margin) | $0.12m (2.9%) | $0.64m (18.9%) | $0.26m (3.7%) | $1.45m (20.3%) |
| Research and development | $3.97m | $2.71m | $7.13m | $4.66m |
| Selling, general and administrative | $4.32m | $4.73m | $10.12m | $11.15m |
| Operating loss | $(8.17)m | $(6.81)m | $(17.00)m | $(14.35)m |
| Loss from continuing operations | $(8.63)m | $(7.24)m | $(17.49)m | $(15.22)m |
| Net loss | $(8.63)m | $(33.42)m | $(17.49)m | $(42.63)m |
| Loss per common share | $(0.46) | $(1.53) | $(0.99) | $(2.44) |
The much larger 2012 net losses included discontinued China operations and substantial impairment-related charges; they are not directly indicative of continuing-business performance. Q2 2013 revenue rose 29%, but gross profit and gross margin fell sharply. Management attributed revenue recognition and associated cost increases in part to completion of three third-party process-development contracts, including recognition of previously deferred revenue and costs. Six-month revenue declined 4%, while R&D expense rose, principally due to the AMR-001 Phase 2 trial.
- Cash flow: Continuing-operations operating cash use was $13.13m in the first half of 2013, versus $9.84m in the first half of 2012. Investing cash use was $0.27m; financing provided $14.38m. Cash increased by $0.99m to $14.72m.
- Liquidity: At June 30, cash was $14.72m and working capital was approximately $8.1m. Current assets were $16.45m and current liabilities $8.38m.
- Debt and obligations: Notes payable totaled approximately $0.50m and mortgages payable $3.35m. The balance sheet also included $7.55m of acquisition-related contingent consideration. The filing lists $6.70m of mortgage, capital-lease and operating-lease contractual obligations, excluding amounts that could not be reasonably estimated for the clinical-trial CRO agreement.
- Capital raised and share count: First-half financing included an underwritten stock offering with $11.5m gross proceeds, approximately $3.8m gross proceeds from Aspire equity-line sales, and about $0.1m from warrant exercises. Common shares outstanding were 19.58m at June 30; the filing reports 20.32m as of August 7, 2013, on the retrospectively adjusted basis.
Material changes versus comparable periods
- Q2 revenue increased, but the gross margin contracted to 2.9% from 18.9%; the six-month gross margin was 3.7% versus 20.3%.
- Operating losses increased in both the quarter and six-month period. Six-month R&D rose 53%, while SG&A fell 9%.
- Six-month operating cash use increased by approximately $3.3m year over year. Equity issuance funded a substantial portion of the period’s cash needs.
- Interest expense fell substantially because the Series E preferred stock, which had generated significant prior-period discount amortization, was fully redeemed in October 2012.
- Comparisons are affected by the 2012 China businesses being presented as discontinued operations, including the former Erye pharmaceutical business.
Outlook, risks and unusual items
- Management said it expected to complete enrollment in the AMR-001 Phase 2 PreSERVE trial in 2013, with initial data expected six to eight months after the last patient was infused. As of August 8, 2013, 120 of 160 patients had been infused. The company reported approximately $13m spent on the trial through June 30 and estimated costs of approximately $19m over the first two years and up to $27m over five years.
- NeoStem expected to need additional capital to fund cell-therapy development and PCT expansion, including facility clean-room buildouts, automation and potential European expansion. It identified cash, operating revenue, the Aspire equity line, possible warrant or option exercises, and potential debt, equity, asset sales and grants as funding sources, while warning that additional capital might not be available on acceptable terms or at all.
- PCT failed the specified debt-service and debt-to-tangible-net-worth covenants on its mortgage at the June 30, 2013 measurement date; it obtained a lender waiver. The mortgage is classified as current. The filing also describes earlier covenant noncompliance and waivers for a second mortgage.
- Other notable items include the July 16 reverse split, the August 5 move to the Nasdaq Capital Market, and subsequent-to-quarter-end Aspire share purchases of approximately $2.7m and warrant exercises yielding approximately $1.1m gross.
- Risks include continuing operating losses and cash outflows, reliance on future financing, clinical-trial enrollment and results, regulatory and commercialization uncertainty, and the possibility that development or market assumptions prove wrong. Management stated that disclosure controls were effective at a reasonable-assurance level; it reported no material change in internal control over financial reporting and no material change in previously disclosed risk factors.
Key facts for investors to verify
- Confirm the issuer and period: this source is NeoStem, Inc., quarter ended June 30, 2013, despite the request metadata naming Lisata Therapeutics and 2012 Q2.
- Assess whether PCT can improve margins and sustain third-party service revenue after the contract-completion-related revenue and cost recognition described in the filing.
- Track AMR-001 enrollment, trial spending, timing of data, and the company’s ability to finance the program and planned expansion.
- Review the mortgage covenant waiver, current classification of mortgage debt, and the company’s reliance on further equity financing and warrant exercises.
- Evaluate the effect of the reverse split and subsequent share issuance on the fully diluted share count and potential dilution.
- Consider the substantial difference between reported 2012 net loss and continuing-operations results because of discontinued China operations and unusual charges.