Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(
in thousands, except share and per share amounts
)
Forward-Looking Statements
This report contains forward-looking statements. The forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements contained herein. When used in this report, the words "anticipate," "believe," "estimate," "expect" and similar expressions as they relate to the Company or its management are intended to identify such forward-looking statements. Actual results, performance or achievements could differ materially from the results expressed in, or implied by these forward-looking statements. Readers should be aware of important factors that, in some cases, have affected, and, in the future, could affect actual results, and may cause actual results for fiscal year 2017 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. These factors include without limitation, the ability to obtain capital and other financing in the amounts and at the times needed to complete clinical trials and launch new products, market acceptance of new products, the nature and timing of regulatory approvals for both new products and existing products for which the Company proposes new claims, realization of forecasted revenues, expenses and income, initiatives by competitors, price pressures, failure to meet FDA regulated requirements governing the Company’s products and operations (including the potential for product recalls associated with such regulations), risks associated with initiating manufacturing for new products, failure to meet Foreign Corrupt Practice Act regulations, legal proceedings, and other risk factors listed from time to time in our SEC reports, including, in particular, those set forth in the Cesca Therapeutics Inc. Form 10-K for fiscal year 2016. Dollars and amounts set forth below are in thousands, except share and per share amounts.
Overview
Cesca develops and markets integrated cellular therapies and delivery systems that advance the safe and effective practice of regenerative medicine. The Company is a leader in the development and manufacture of automated blood and bone marrow processing systems that enable the separation, processing and preservation of cell and tissue therapy products. The Company was founded in 1986 and is headquartered in Rancho Cordova, California. The Company’s strategy is to continue to enhance the performance and competitiveness of its flagship product lines in the cord blood banking arena while expanding into significant new growth opportunity areas in point of care therapeutics. The Company is developing a number of offerings for the delivery of autologous cell therapies that address significant unmet medical needs and expect to partner with other pioneers in the stem cell arena to accelerate clinical evaluations, expedite regulatory approvals and penetrate the market.
On March 4, 2016, the Company affected a one (1) for twenty (20) reverse split of its issued and outstanding common stock. There were no changes to its authorized number of shares of common stock of 350,000,000. All historical share amounts disclosed herein have been retroactively recast to reflect the reverse split and subsequent share exchange.
Stem Cell Therapies
Cesca has nine cell therapies at various stages of clinical development, all but one with human data. These include critical limb ischemia (“CLI”), acute myocardial infarction (AMI), non-healing ulcers, ischemic stroke, spinal fusion, osteoarthritis, non-union fractures and avascular necrosis. The Company also has an active bone marrow transplantation (“BMT”) program. Cesca’s current emphasis is in three particular areas, as follows:
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Critical Limb Ischemia (“CLI”)
–
The Company
received FDA approval on June 12, 2015 for an Investigational Device Exemption (“IDE”) for its pivotal clinical trial (the “CLIRST III” study) to evaluate the SurgWerks
™
- CLI System for the treatment of patients with late-stage, no option, critical limb ischemia. CLI is the last progressive phase of peripheral artery disease, where the leg is so deprived of blood flow and oxygen, that it has visible signs of gangrenous ulceration. The Company has supported or completed two prior feasibility studies in CLI, one delivering a Cesca platform prepared autologous bone marrow cell dose into the afflicted leg artery of 13 human subjects, and the other delivering a similar Cesca platform prepared cell dose into the afflicted limb muscles of 17 human subjects. Cesca is currently engaged in an active dialog with the FDA regarding approaches to moving forward with the CLIRST III clinical trial.
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Acute Myocardial Infarction (
“
AMI
”
)
– The SurgWerks
TM
– AMI System has been designed to facilitate an adjunct treatment for patients who have suffered an acute ST-elevated myocardial infarction (“STEMI”), a particular and most threatening type of heart attack. Therapies delivered using the SurgWerks-AMI system are intended to minimize the adverse remodeling of the heart post-STEMI. The entire 4-step bedside treatment is designed to take less than 120 minutes to complete, in a single surgical procedure, in the heart catheterization laboratory of a hospital.
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Bone Marrow Transplant (
“
BMT
”
)
–
The Company has two initiatives within its BMT program: development of the CellWerks™ technology platform for clinical and intra-laboratory use, and the delivery of BMT laboratory services through Cesca’s TotipotentRX subsidiary in India. The CellWerks
Platform is designed for optimal laboratory preparation of hematopoietic stem cells to be used in BMT and bio-banking. The technology platform includes a “smart vision” control module, a corresponding disposable for processing blood and bone marrow sourced tissue and sample tracking software enabling GMP compliance. Cell analytics for laboratory and point of care use are under development and will complete the CellWerks offering
. The laboratory services provided by TotipotentRX, in collaboration with Fortis Healthcare, are aimed at serving the Indian clinical market for cell therapy.
Products
Cesca’s product offerings include:
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The
SurgWerks™ System
(in development) - a proprietary system comprised of the SurgWerks Processing Platform, including devices and analytics, and indication-specific SurgWerks Procedure Kits for use in regenerative stem cell therapy at the point of care for vascular and orthopedic diseases.
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The
CellWerks™ System
(in development) - a proprietary cell processing system with associated analytics for intra-laboratory preparation of adult stem cells from bone marrow or blood.
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The
AutoXpress
®
System (AXP
®
)
- a proprietary automated device and companion sterile disposable for concentrating hematopoietic stem cells from cord blood.
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The
MarrowXpress™ System (MXP™)
- a derivative product of the AXP and its accompanying sterile disposable for the isolation and concentration of hematopoietic stem cells from bone marrow.
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The
BioArchive® System
- an automated cryogenic device used by cord blood banks for the cryopreservation and storage of cord blood stem cell concentrate for future use.
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Manual Disposables
- bag sets for use in the processing and cryogenic storage of cord blood.
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The following is management’s discussion and analysis of certain significant factors which have affected the Company’s financial condition and results of operations during the period included in the accompanying condensed consolidated financial statements.
Critical Accounting Policies
Management’s discussion and analysis of its financial condition and results of operations is based upon the condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a full discussion of our accounting estimates and assumptions that have been identified as critical in the preparation of the Company’s condensed consolidated financial statements, please refer to Cesca’s 2016 Annual Report on Form 10-K.
Results of Operations for the Three Months Ended
September 30
, 201
6
as Compared to the Three Months Ended
September 30
, 201
5
Net Revenues
Net revenues for the three months ended September 30, 2016 were $3,767 compared to $2,823 for the three months ended September 30, 2015, an increase of $944. The increase is primarily a result of increased shipments of AXP disposables and management expects the favorable trend to continue through the second quarter of fiscal 2017. Revenues from Cesca’s Res-Q product line also increased as a result of a final shipment during the quarter to the Company’s largest distributor consistent with the Company’s plan to withdraw the product from the market. We expect Res-Q revenues to return to prior year levels.
The following represents the Company’s revenues by product platform for the three months ended:
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September 30
,
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2016
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2015
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AXP
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$
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1,857
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$
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1,361
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BioArchive
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905
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703
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ResQ BMC and MXP
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570
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205
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Manual Disposables
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343
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|
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407
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Other
|
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|
92
|
|
|
|
147
|
|
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$
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3,767
|
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$
|
2,823
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Gross Profit
The Company’s gross profit was $1,382 or 37% of net revenues for the three months ended September 30, 2016, compared to $367 or 13% for the corresponding fiscal 2016 period. Gross profit increased primarily due to lower overhead costs as a result of Cesca’s September 2015 restructuring initiative to reduce headcount primarily associated with our cord blood banking product line and additions to inventory reserves in the first quarter of fiscal 2016.
Sales and Marketing Expenses
Sales and marketing expenses were $481 for the three months ended September 30, 2016, compared to $632 for the comparable fiscal 2016 period, a decrease of $151 or 24%. The decrease is primarily due to lower personnel costs as a result of the Company’s September 2015 restructuring initiative.
Research and Development Expenses
Research and development expenses include costs associated with Cesca’s engineering, regulatory, scientific and clinical functions.
Research and development expenses were $670 for the three months ended September 30, 2016, compared to $1,097 for the comparable fiscal 2016 period, a decrease of $427 or 39%. The decrease is primarily due to lower personnel costs as a result of the Company’s September 2015 restructuring initiative and other headcount reductions and a reduction in rent expense associated with consolidation of the Company’s US operations into its Rancho Cordova facility. Management expects research and development expense to increase as and when the Company initiates enrollment in the CLIRST III clinical trial.
General and Administrative Expenses
General and administrative expenses include costs associated with accounting, finance, human resources, information system and executive functions.
General and administrative expenses were $2,179 for the three months ended September 30, 2016, compared to $2,552 for the three months ended September 30, 2015, a decrease of $373 or 15%. The decrease is primarily due to lower personnel costs and a reduction in stock compensation.
Non-U.S. GAAP Measures
In addition to the results reported in accordance with U.S. GAAP, Cesca also uses a non-U.S. GAAP measure, adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”), to evaluate operating performance and to facilitate comparison with historical results and trends. This financial measure is not a measure of financial performance under U.S. GAAP and should not be considered in isolation or as a substitute for loss as a measure of performance. The calculation of this non-U.S. GAAP measure may not be comparable to similarly titled measures used by other companies. Reconciliations to the most directly comparable U.S. GAAP measure are provided below.
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Three Months Ended September 30,
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2016
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2015
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Loss from operations
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$
|
(1,948
|
)
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$
|
(3,914
|
)
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Add:
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Depreciation and amortization
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261
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365
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Stock-based compensation expense
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298
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343
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Adjusted EBITDA loss
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$
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(1,389
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)
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$
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(3,206
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)
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Adjusted EBITDA
Adjusted EBITDA loss was $1,389 for the three months ended September 30, 2016 compared to $3,206 for the three months ended September 30, 2015. The adjusted EBITDA loss decreased compared to the first quarter in the prior year due to lower personnel costs and a higher gross profit margin.
Liquidity and Capital Resources
At September 30, 2016, the Company had cash and cash equivalents of $5,608 and working capital of $8,232. This compares to cash and cash equivalents of $5,835 and working capital of $7,301 at June 30, 2016. The increase is primarily due to an August 2016 financing in which 600,000 shares of Cesca’s common stock were sold for net proceeds to the Company of $2.1 million.
On August 22, 2016, the Company elected to convert all outstanding principal and interest accrued and otherwise payable under Debentures aggregating $23,905 dating back to Cesca’s February 2016 financing. Upon conversion, 6,102,941 shares of common stock were issued and the Debentures plus all related security interests and liens were terminated.
The Company anticipates a need for additional funding to support its clinical programs, in particular the CLIRST III clinical trial. As such, management continues to investigate potential new sources of capital, including strategic partner relationships. Cesca cannot assure that such funding will be available, however, on a timely basis, in needed quantities, or on favorable terms, if at all.
Because of recurring and expected operating losses, its cash balance and severance payments due to the departing Chief Executive Officer, there is substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These condensed consolidated financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.
Net cash used in operating activities for the three months ended September 30, 2016 was $2,009 compared to $1,305 for the three months ended September 30, 2015. The increase was primarily due to a limited number of above-average vendor payments.
On August 3, 2016, the Company sold 600,000 shares of common stock at a price of $4.10 per share.
The net proceeds to the Company from the sale and issuance of the shares, after deducting the offering expenses borne by the Company, were $2,091.
Off-Balance Sheet Arrangements
As of September 30, 2016, the Company had no off-balance sheet arrangements.