SEC Form 10-Q Summary
Issuer: Aastrom Biosciences, Inc. (the source filing does not identify Vericel Corp.)
Reporting period: Quarter and six months ended June 30, 2014; filed August 14, 2014. Financial statements are unaudited.
Business Context and Reporting Period
On May 30, 2014, Aastrom acquired portions of Sanofi’s cell therapy and regenerative medicine business, including Carticel, MACI and Epicel, Genzyme Biosurgery ApS, more than 250 patents and related manufacturing, sales and marketing capabilities. The acquisition moved the company from development stage to commercial stage. Reported 2014 results include approximately one month of acquired-business operations.
The company’s continuing development program was ixmyelocel-T for advanced heart failure associated with ischemic dilated cardiomyopathy. The Phase 2b ixCELL-DCM trial was enrolling 108 patients, with management expecting enrollment completion in 2014 and top-line efficacy results approximately 12 months later.
Key Financial Metrics
| Metric | Three months ended June 30, 2014 | Three months ended June 30, 2013 | Six months ended June 30, 2014 | Six months ended June 30, 2013 |
|---|---|---|---|---|
| Revenue | $4.432 million | $0.003 million | $4.432 million | $0.011 million |
| Gross profit (loss) | $(0.577) million | $0.002 million | $(0.577) million | $0.008 million |
| Gross margin | (13)% | 67% | (13)% | 73% |
| Operating loss | $(8.522) million | $(5.234) million | $(13.166) million | $(12.399) million |
| Net loss | $(4.638) million | $(4.889) million | $(10.633) million | $(10.433) million |
| Net loss per common share | $(0.94) | $(2.72) | $(2.18) | $(5.75) |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $(10.743) million | $(11.461) million |
- 2014 revenue consisted principally of approximately $3.4 million from Carticel implants and surgical kits, $0.9 million from Epicel grafts and biopsy kits, and $0.1 million from bone marrow sales.
- One U.S. customer represented 76% of revenue in both the quarter and six-month period ended June 30, 2014.
- Cash was $7.263 million at June 30, 2014, compared with $8.059 million at December 31, 2013. Total assets were $19.836 million and shareholders’ equity was $2.785 million.
- Current liabilities were $17.051 million, including $2.500 million of short-term debt and $2.974 million of warrant liabilities.
- The company had an accumulated deficit of $298.398 million.
- Six-month financing proceeds were $8.917 million, comprising $3.2 million raised through Lincoln Park and $5.3 million of net proceeds through the at-the-market program.
Material Changes Versus the Prior Comparable Period
- Revenue increased sharply because the acquired commercial business contributed one month of sales; the acquisition makes direct year-over-year comparisons less meaningful.
- Gross margin declined to negative 13%, primarily because $2.4 million of restructuring costs were recorded in cost of product sales. Excluding that charge, the filing does not present a separate adjusted gross margin.
- Quarterly research and development expense increased to $4.364 million from $3.676 million, mainly due to higher ixCELL-DCM enrollment costs and acquired-business expenses. Six-month research and development expense declined to $7.635 million from $9.214 million because the critical limb ischemia trial substantially wound down.
- Quarterly selling, general and administrative expense increased to $3.581 million from $1.560 million due to acquired-business costs, acquisition-related legal expenses and restructuring charges.
- Operating cash use improved modestly from $11.461 million to $10.743 million for the six-month comparison, but remained substantial.
- The acquisition generated a preliminary $3.634 million bargain purchase gain, which reduced the reported net loss but was non-recurring in nature.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide formal revenue or earnings guidance. It stated that positive operating cash flow was not expected for at least several years and that additional financing would be required.
- The company stated that $7.3 million of cash was insufficient to sustain operations for one year and disclosed substantial doubt about its ability to continue as a going concern. Management was evaluating financing and strategic alternatives to maintain liquidity through December 31, 2014 and beyond.
- On July 30, 2014, after the reporting date, the company repaid the $2.5 million Sanofi promissory note plus approximately $1,400 of interest.
- The company raised approximately $1.5 million of net proceeds in July 2014 through the exercise of 362,500 warrants; the warrant liability was reduced by approximately 33%.
- The restructuring plan eliminated approximately 80 full-time positions, or about 30% of the workforce, discontinued MACI manufacturing in Denmark, temporarily ceased European MACI sales and reduced MACI research and development. The company expected the plan to be completed by the end of the fourth quarter of 2014.
- Restructuring charges were $3.0 million in the quarter, with a $2.6 million reserve remaining at June 30. Potential additional costs included approximately $0.6 million of lease termination costs and $0.2 million of stay-on bonuses. The company also recorded a $1.6 million asset retirement obligation for the Denmark facility.
- Epicel pricing was increased effective July 1, 2014 to reflect the full costs permitted under applicable humanitarian-use-device rules. The filing states that the impact on profitable sales remained under evaluation.
- The Cambridge, Massachusetts manufacturing facility received an FDA Form 483 listing inspection observations. The company was undertaking remedial measures, but could not assure that the FDA would deem them adequate.
- Management identified a material weakness in internal control over financial reporting related to significant-transaction evaluation and the financial close process. The weakness contributed to adjustments identified by the independent registered public accounting firm. Remediation included hiring consultants and additional experienced finance personnel.
- Other risks included dependence on additional equity financing, customer concentration, regulatory approval and manufacturing compliance, clinical-trial execution, single-site manufacturing, supplier concentration, reimbursement limitations, intellectual-property protection and integration of the acquired business.
- If MACI is further developed in the United States, potential regulatory and commercialization milestone payments of up to $15.8 million may become payable to Verigen; no amount was accrued because payment was not probable and could not be reasonably estimated.
Facts Investors Should Verify
- Confirm the issuer identity: the supplied filing is for Aastrom Biosciences, Inc., not Vericel Corp.
- Assess post-acquisition revenue quality, sustainable product margins and the effect of restructuring on future cost of sales.
- Verify available liquidity after repayment of the Sanofi note, subsequent warrant proceeds and any additional equity issuance.
- Monitor remediation of the material weakness and the reliability of future financial reporting.
- Track FDA responses to the Cambridge facility inspection observations and ongoing manufacturing compliance.
- Evaluate enrollment, timing and results of the ixCELL-DCM Phase 2b trial, as well as regulatory prospects for MACI in the United States.
- Review customer concentration, reimbursement conditions, MACI-related milestone obligations and the remaining lease and Denmark facility liabilities.