Item 1.
|
Financial Statements.
|
Athersys, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
(Unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
28,234
|
|
|
$
|
14,753
|
|
Accounts receivable
|
|
|
707
|
|
|
|
598
|
|
Prepaid expenses and other
|
|
|
1,031
|
|
|
|
929
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
29,972
|
|
|
|
16,280
|
|
Equipment, net
|
|
|
2,265
|
|
|
|
2,605
|
|
Deferred tax assets
|
|
|
198
|
|
|
|
175
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
32,435
|
|
|
$
|
19,060
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
4,285
|
|
|
$
|
4,761
|
|
Accrued compensation and related benefits
|
|
|
1,017
|
|
|
|
1,190
|
|
Accrued clinical trial costs
|
|
|
146
|
|
|
|
389
|
|
Accrued expenses
|
|
|
412
|
|
|
|
535
|
|
Deferred revenue
|
|
|
503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
6,363
|
|
|
|
6,875
|
|
Warrant liabilities
|
|
|
|
|
|
|
1,004
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, at stated value; 10,000,000 shares authorized, and no shares issued and
outstanding at September 30, 2017 and December 31, 2016
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 300,000,000 and 150,000,000 shares authorized at
September 30, 2017 and December 31, 2016, respectively, and 116,883,763 and 86,629,302 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively
|
|
|
117
|
|
|
|
87
|
|
Additional
paid-in
capital
|
|
|
363,485
|
|
|
|
329,373
|
|
Accumulated deficit
|
|
|
(337,530
|
)
|
|
|
(318,279
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
26,072
|
|
|
|
11,181
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
32,435
|
|
|
$
|
19,060
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
3
Athersys, Inc.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except share and per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract revenue
|
|
$
|
179
|
|
|
$
|
150
|
|
|
$
|
1,888
|
|
|
$
|
15,410
|
|
Grant revenue
|
|
|
220
|
|
|
|
161
|
|
|
|
650
|
|
|
|
954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
399
|
|
|
|
311
|
|
|
|
2,538
|
|
|
|
16,364
|
|
Costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
5,441
|
|
|
|
5,263
|
|
|
|
15,707
|
|
|
|
17,750
|
|
General and administrative
|
|
|
2,113
|
|
|
|
1,830
|
|
|
|
6,391
|
|
|
|
5,831
|
|
Depreciation
|
|
|
177
|
|
|
|
114
|
|
|
|
508
|
|
|
|
248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
7,731
|
|
|
|
7,207
|
|
|
|
22,606
|
|
|
|
23,829
|
|
Gain from insurance proceeds, net
|
|
|
|
|
|
|
682
|
|
|
|
|
|
|
|
682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(7,332
|
)
|
|
|
(6,214
|
)
|
|
|
(20,068
|
)
|
|
|
(6,783
|
)
|
Income (expense) from change in fair value of warrants, net
|
|
|
|
|
|
|
191
|
|
|
|
728
|
|
|
|
(1,689
|
)
|
Other income, net
|
|
|
71
|
|
|
|
7
|
|
|
|
155
|
|
|
|
228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(7,261
|
)
|
|
|
(6,016
|
)
|
|
|
(19,185
|
)
|
|
|
(8,244
|
)
|
Income tax benefit
|
|
|
18
|
|
|
|
12
|
|
|
|
44
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss and comprehensive loss
|
|
$
|
(7,243
|
)
|
|
$
|
(6,004
|
)
|
|
$
|
(19,141
|
)
|
|
$
|
(8,210
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic
|
|
$
|
(0.06
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.10
|
)
|
Weighted average shares outstanding, basic
|
|
|
114,515,405
|
|
|
|
84,928,198
|
|
|
|
109,506,379
|
|
|
|
84,352,347
|
|
Net loss per share, diluted
|
|
$
|
(0.06
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.10
|
)
|
Weighted average shares outstanding, diluted
|
|
|
114,515,405
|
|
|
|
85,896,993
|
|
|
|
109,506,379
|
|
|
|
84,352,347
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
4
Athersys, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(19,141
|
)
|
|
$
|
(8,210
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
508
|
|
|
|
248
|
|
Gain from forgiveness of note payable
|
|
|
|
|
|
|
(190
|
)
|
Stock-based compensation
|
|
|
2,232
|
|
|
|
2,177
|
|
Gain from insurance proceeds, net
|
|
|
|
|
|
|
(682
|
)
|
Change in fair value of warrant liabilities
|
|
|
(728
|
)
|
|
|
1,689
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(109
|
)
|
|
|
63
|
|
Prepaid expenses and other
|
|
|
(125
|
)
|
|
|
(262
|
)
|
Accounts payable and accrued expenses
|
|
|
(1,015
|
)
|
|
|
765
|
|
Deferred revenue
|
|
|
503
|
|
|
|
(245
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(17,875
|
)
|
|
|
(4,647
|
)
|
Investing activities
|
|
|
|
|
|
|
|
|
Purchase of
available-for-sale-securities
|
|
|
|
|
|
|
(15,903
|
)
|
Sales of
available-for-sale-securities
|
|
|
|
|
|
|
4,830
|
|
Purchases of equipment
|
|
|
(168
|
)
|
|
|
(1,635
|
)
|
Proceeds from insurance
|
|
|
|
|
|
|
507
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(168
|
)
|
|
|
(12,201
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net
|
|
|
29,863
|
|
|
|
2,386
|
|
Shares retained for withholding tax payments on stock-based awards
|
|
|
(200
|
)
|
|
|
(418
|
)
|
Proceeds from exercise of warrants
|
|
|
1,861
|
|
|
|
162
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
31,524
|
|
|
|
2,130
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
13,481
|
|
|
|
(14,718
|
)
|
Cash and cash equivalents at beginning of the period
|
|
|
14,753
|
|
|
|
23,027
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the period
|
|
$
|
28,234
|
|
|
$
|
8,309
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
5
Athersys, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Three- and Nine-Month Periods Ended September 30, 2017 and 2016
1. Background and Basis of Presentation
We are an
international biotechnology company that is focused primarily in the field of regenerative medicine and operate in one business segment. Our operations consist primarily of research and product development activities.
We incurred losses since our inception in 1995 and had an accumulated deficit of $338 million at September 30, 2017. We will require substantial
additional capital to continue our research and development programs, including progressing our clinical product candidates to commercialization and preparing for commercial-scale manufacturing. At September 30, 2017, we had available cash and
cash equivalents of $28.2 million, and we believe that these funds, used to execute our existing operating plans, are sufficient to meet our obligations as they come due for a period of at least twelve months from the date of the issuance of
these unaudited condensed consolidated financial statements. In the longer term, we will make use of available cash, but will have to continue to generate additional capital to meet our needs through new and existing collaborations and related
license fees and milestones, the sale of equity securities from time to time, including through our equity purchase agreement, grant-funding opportunities, deferring certain discretionary costs and staging certain development costs, as needed.
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto
included in our Annual Report on Form
10-K
for the year ended December 31, 2016. The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles
(GAAP) for interim financial information and Article 10 of Regulation
S-X.
Accordingly, since they are interim statements, the accompanying financial statements do not include all of the
information and notes required by GAAP for complete financial statements. The accompanying financial statements reflect all adjustments, consisting of normal recurring adjustments, that are, in the opinion of management, necessary for a fair
presentation of financial position and results of operations for the interim periods presented. Interim results are not necessarily indicative of results for a full year.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Our critical accounting policies, estimates and assumptions are described in Managements Discussion and Analysis of Financial Condition and Results of Operations, which is included below
in this Quarterly Report on Form
10-Q.
2. Recently Issued Accounting Standards
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09,
Compensation -
Stock Compensation - Improvements to Employee Share-Based Payment Accounting
(ASU 2016-09), which involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification
of awards as either equity or liabilities, and classification on the statement of cash flows. Under the new standard, income tax benefits and deficiencies are to be recognized as income tax expense or benefit in the statement of operations and the
tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur.
6
An entity should also recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. Excess tax benefits should be classified along with other income
tax cash flows as an operating activity. In regard to forfeitures, the entity may make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. We have
adopted ASU
2016-09,
effective on January 1, 2017. Upon adoption, we elected to change our policy and to recognize the impact of forfeitures when they occur, and we recognized a cumulative effect
adjustment to accumulated deficit on a modified-retrospective basis as of January 1, 2017 of approximately $0.1 million.
In February 2016, the
FASB issued ASU
2016-02,
Leases (Topic 842)
(ASU
2016-02),
which requires lessees to put most leases on their balance sheets, but recognize expenses
on their income statements in a manner similar to current accounting practice. Under the guidance, lessees initially recognize a lease liability for the obligation to make lease payments and a
right-of-use
(ROU) asset for the right to use the underlying asset for the lease term. The lease liability is measured at the present value of the lease payments over the lease term. The ROU asset
is measured at the lease liability amount, adjusted for lease prepayments, lease incentives received and the lessees initial direct costs. The guidance is effective for the annual and interim periods beginning after December 15, 2018,
with early adoption permitted. We have not elected to early adopt ASU
2016-02
in 2017 and are in the process of evaluating the impact the new guidance will have on our consolidated financial statements upon
adoption. We currently have operating leases for two facilities that will need to be evaluated under ASU
2016-02.
In May 2014, the FASB issued ASU
No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
(ASU
2014-09).
ASU
2014-09
requires an entity to recognize revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, the amendment provides five steps that an entity should apply when recognizing revenue. The amendment also
specifies the recognition of some costs to obtain or fulfill a contract with a customer and expands the disclosure requirements around contracts with customers. An entity can either adopt this amendment retrospectively to each prior reporting period
presented or retrospectively with the cumulative effect of initially applying the update recognized at the date of initial application. In August 2015, the FASB issued ASU
2015-14,
which delayed the effective
date of ASU
2014-09
by one year, making the new standard effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted for annual reporting periods
beginning after December 15, 2016. We plan to adopt ASU
2014-09
effective January 1, 2018 under the modified retrospective approach. We have developed an implementation plan, identified our revenue
streams and concluded that each of our contracts will be evaluated on a
one-for-one
basis to assess the impact of the new guidance on our consolidated financial
statements. We are now evaluating each of the potential deliverables from our collaboration agreements and grant awards, as well as documenting our internal controls over the adoption and implementation of the new standard. As the evaluation of our
contracts is in process, we have not yet fully determined the impact that adopting ASU
2014-09
will have on our consolidated financial statements; however, we expect that the adoption of the new standard may
result in increased disclosures in our financial statements and increased internal control processes over the revenue evaluation process.
7
3. Net Loss per Share
Basic and diluted net loss per share have been computed using the weighted-average number of shares of common stock outstanding during the period. The table
below reconciles the net loss and the number of shares used to calculate basic and diluted net loss per share for the three- and nine-month periods ended September 30, 2017 and 2016, in thousands, except per share data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders - Basic
|
|
$
|
(7,243
|
)
|
|
$
|
(6,004
|
)
|
|
$
|
(19,141
|
)
|
|
$
|
(8,210
|
)
|
Less: income from change in fair value of warrants
|
|
|
|
|
|
|
(191
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders used to calculate diluted net loss per share
|
|
$
|
(7,243
|
)
|
|
$
|
(6,195
|
)
|
|
$
|
(19,141
|
)
|
|
$
|
(8,210
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding - Basic
|
|
|
114,515
|
|
|
|
84,928
|
|
|
|
109,506
|
|
|
|
84,352
|
|
Potentially dilutive common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
|
|
|
|
969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used to calculate diluted net loss per share
|
|
|
114,515
|
|
|
|
85,897
|
|
|
|
109,506
|
|
|
|
84,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
(0.06
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.10
|
)
|
Dilutive earnings per share
|
|
$
|
(0.06
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.10
|
)
|
We have outstanding stock-based awards and warrants that are not used in the calculation of diluted net loss per share because
to do so would be antidilutive. The following instruments were excluded from the calculation of diluted net loss per share because their effects would be antidilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Stock-based awards
|
|
|
10,880,000
|
|
|
|
10,840,306
|
|
|
|
10,880,000
|
|
|
|
10,840,306
|
|
Warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,893,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,880,000
|
|
|
|
10,840,306
|
|
|
|
10,880,000
|
|
|
|
12,733,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. Financial Instruments
Fair Value Measurements
We classify the inputs used to
measure fair value into the following hierarchy:
|
|
|
Level 1
|
|
Unadjusted quoted prices in active markets for identical assets or liabilities.
|
|
|
Level 2
|
|
Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are
observable for the asset or liability.
|
|
|
Level 3
|
|
Unobservable inputs for the asset or liability.
|
At September 30, 2017, we had no financial assets or liabilities measured at fair value on a recurring basis. At
December 31, 2016, we had warrant liabilities of $1,004,000 that represented Level 3 liabilities under the hierarchy. In March 2017, these warrants were either exercised or expired, and we no longer have any outstanding warrants.
8
We review and reassess the fair value hierarchy classifications on a quarterly basis. Changes from one quarter to
the next related to the observability of inputs in a fair value measurement may result in a reclassification between fair value hierarchy levels. There were no reclassifications for all periods presented.
The estimated fair value of warrants accounted for as liabilities, representing a Level 3 fair value measure, was determined on the issuance date and
subsequently marked to market at each financial reporting date. We use the Black-Scholes valuation model to value the warrant liabilities at fair value. The fair value was estimated using the expected volatility based on our historical volatility
and is determined using probability weighted-average assumptions, when appropriate.
A roll-forward of fair value measurements using significant
unobservable inputs (Level 3) for the warrant liabilities is as follows (in thousands):
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
September 30, 2017
|
|
Balance January 1, 2017
|
|
$
|
1,004
|
|
Settlements from exercises
|
|
|
(276
|
)
|
Gain included in income from change in fair value of warrants
|
|
|
(728
|
)
|
|
|
|
|
|
Balance September 30, 2017
|
|
$
|
|
|
|
|
|
|
|
5. Insurance Recovery
In
May 2016, a flood caused damage to our primary facilities that required the reconstruction of certain laboratory space over several months. The damaged items included fully-depreciated leasehold improvements under an operating lease and laboratory
supplies, all of which were covered by insurance and were replaced at replacement cost. Net insurance recovery proceeds resulted in the recognition of a net insurance recovery gain amounting to $682,000 as of September 30, 2016. Since the
majority of the damage from the flood was to fully-depreciated leasehold improvements, the amount of losses were less than the amount of the insurance proceeds received. No insurance recoveries were recognized in the nine-month period ended
September 30, 2017.
6. Collaborative Arrangements and Revenue Recognition
Healios
In January 2016, we entered into a license
agreement (Healios Agreement) with HEALIOS K.K. (Healios) to develop and commercialize MultiStem cell therapy for ischemic stroke in Japan, and to provide Healios with access to Athersys proprietary stem cell technology
for use in Healios organ bud program, initially for transplantation to treat liver disease or dysfunction. Under the Healios Agreement, Healios also obtained a right, at their option, to expand the scope of the collaboration to
include the exclusive rights to develop and commercialize MultiStem for the treatment of two additional indications in Japan, which include acute respiratory distress syndrome (ARDS) and another indication in the orthopedic area, and to
include all indications for the organ bud program. Healios may exercise its option to expand the collaboration prior to certain milestone dates that are expected to occur within the next several years.
9
Under the terms of the Healios Agreement, we received a nonrefundable,
up-front
cash payment of $15 million from Healios. Healios is responsible for the costs of clinical development in Japan. Athersys is providing manufacturing services to Healios, currently comprising the
supply of product for its clinical trial and preparations for commercial manufacturing, and we receive payments for product supplied to Healios.
For the
ischemic stroke indication, we may also receive additional success-based development, regulatory approval and sales milestones, which are
non-refundable
and
non-creditable
towards future royalties or any other payment due from Healios. We will also receive tiered royalties on net product sales, starting in the low double-digits and increasing incrementally into
the high teens, depending on net sales levels.
If Healios exercises the option to expand the collaboration to include ARDS and another indication in the
orthopedic area, we would be entitled to receive a cash payment of $10 million at the time of exercise and receive royalties from product sales and success-based development, regulatory approval and sales milestones, as well as payments for
product supply related to the additional indications covered by the option.
For the organ bud product, we are entitled to receive a
fractional royalty percentage on net sales of the organ bud products and will receive payments for manufactured product supplied to Healios under a manufacturing supply agreement. Additionally, we have a right of first negotiation for
commercialization of an organ bud product in North America, with such right expiring on certain dates in the future.
To determine the
appropriate accounting for the license agreement, we evaluated the Healios Agreement and related facts and circumstances, focusing in particular on the rights and obligations of the arrangement. We determined that our obligations under the Healios
Agreement represent multiple deliverables, and for deliverables with standalone value, our policy is to account for these as separate units of accounting. We allocate the overall consideration of the arrangement that is fixed and determinable,
excluding consideration that is contingent upon future deliverables, to the separate units of accounting based on estimated selling prices (as defined in ASC
605-25)
of each deliverable.
Given Healios ability to sublicense under the Healios Agreement and its ability to conduct the ongoing development efforts at the inception of the
arrangement, we concluded that the license had stand-alone value and would be treated as a separate unit of accounting, noting also that there was no general right of return associated with the license. Furthermore, the preclinical and clinical
manufacturing services and certain near-term regulatory advisory services to be provided to Healios under the Healios Agreement were also determined to have stand-alone value and considered separate units of accounting at the inception of the
arrangement.
We were unable to establish vendor-specific objective evidence of selling price or third-party evidence for either the license or the
services, and thus, instead, allocated the arrangement consideration between the license and the services based on their relative selling prices using a best estimate of selling price (BESP). We developed the BESP of the license using a
probability-weighted, discounted cash flow analysis using the income approach, taking into consideration market assumptions, including the estimated development and commercialization timeline, data regarding patient population, discount rate related
to our industry, and probability of success using market data for both our industry and the therapeutic field. We estimated the BESP of the manufacturing services and certain near-term regulatory advisory services using actual historical experience
and best estimates of the cost of obtaining these services at arms length from a third-party provider, including an estimated
mark-up.
As a result of the analysis, we initially allocated the
$15 million of proceeds received to the license, which represented the amount of consideration that was allocable at inception pursuant to the relative selling price and was not contingent upon delivery of additional items under the Healios
Agreement.
10
The license was delivered and the proceeds allocated to it were recognized as revenue in January 2016. Amounts received under the Healios Agreement are included within contract revenues in the
consolidated statement of operations and comprehensive loss.
Other contingent deliverables that were not accounted for at the inception of the
arrangement, and will not be accounted for until the contingency is resolved, included the potential expansion of the collaboration to include additional indications, and the milestones that are not substantive since they are dependent on the
activities of Healios. Further, the Healios arrangement contemplates our providing manufacturing services for commercial product supply, the terms of which are not defined and are to be agreed upon in the future under a separate commercial supply
agreement. Upon the removal of these contingencies or modifications to the deliverables under the arrangement, we will reevaluate the allocation of revenue to the remaining undelivered items, including the estimated selling prices and the overall
consideration of the arrangement, with any changes in estimates accounted for on a prospective basis.
In January 2017, we signed a clinical trial supply
agreement for the manufacturing of investigational product for Healios for its Japan clinical study, the terms of which were consistent with the license agreement. The clinical trial supply agreement was amended in July 2017 and clarifies the
operational elements, terms and cost-sharing arrangement associated with our supply of clinical material. The manufacturing proceeds from Healios that relate specifically to the cost-sharing arrangement may result in a reduction in the proceeds we
receive from Healios upon the achievement of two future milestones, and an increase to a late-stage commercial milestone. Of the aggregate $225 million of potential proceeds from success-based development, regulatory approval and sales
milestones, the maximum decrease related to current cost-sharing proceeds amounts to less than 6% of the aggregate milestones, and the maximum increase amounts to less than 3%. The cost-sharing proceeds received are not recognized as revenue until
the related milestone is achieved, at which time, the culmination of the earnings process will be complete. Until that time, the cost-sharing proceeds, upon receipt, will be reflected on the balance sheet. We expect to receive the first cost-sharing
proceeds from Healios in the fourth quarter of 2017.
In September 2017, we entered into a services agreement with Healios, in which Healios provides
financial support to establish a contract manufacturer in Japan to produce product for Healios. The arrangement includes a potential decrease to the amount we may receive from a future milestone if Healios is unable to obtain product from the
contract manufacturer within a specified period of time. We expect the services under this arrangement to commence in the fourth quarter of 2017.
Furthermore, in September 2017, we amended the Healios Agreement to confer to Healios a limited license to manufacture MultiStem in the event that we are
acquired by a third-party.
Other
In January 2017,
we received an option fee related to an agreement that was entered into in December 2016 with a global leader in the animal health business segment to evaluate our cell therapy technology for application in an animal health area. Under the terms of
the agreement, we received the payment in exchange for an exclusive period to evaluate our cell therapy technology with an option to negotiate for a license for the development and commercialization of the technology for the animal health area. The
option fee is recorded as deferred revenue at September 30, 2017 since the performance obligation of granting a license has not occurred. If the option is exercised, we will include the option fee in the overall consideration for the license
arrangement, to be evaluated at that time. If the option is not exercised, the option fee will be recognized as revenue at that time since there will be no more performance obligations. The evaluation of our technology for this application is
currently ongoing.
11
Under our agreement with RTI Surgical, Inc. to develop and commercialize biologic implants using our technology
for certain orthopedic applications in the bone graft substitutes market, we are eligible to receive cash payments upon the successful achievement of certain commercial milestones. The first commercial milestone was achieved in the first quarter of
2017, with a payment in the amount of $1.0 million, which we received in April 2017. In addition, we continue to receive tiered royalties on worldwide commercial sales of implants using our technologies based on a royalty rate starting in the
mid-single
digits and increasing into the
mid-teens.
7. Stock-based
Compensation
We have an incentive plan that authorizes 20,035,000 shares of common stock for awards to employees, directors and consultants. The
incentive plan authorizes the issuance of equity-based compensation in the form of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares and units, and other stock-based awards. In June 2017, a
separate incentive plan with 1,465,000 authorized shares expired according to its terms, and 1,074,391 stock options remain outstanding under the plan that survive the plans expiration. As of September 30, 2017, a total of 3,979,429
shares of common stock have been issued under our equity incentive plans.
As of September 30, 2017, a total of 6,362,584 shares of common stock were
available for issuance under our equity incentive plans, and stock-based awards to purchase 10,880,000 shares of common stock were outstanding. For the three-month periods ended September 30, 2017 and 2016, stock-based compensation expense was
approximately $814,000 and $748,000, respectively. At September 30, 2017, total unrecognized estimated compensation cost related to unvested stock-based awards was approximately $8.0 million, which is expected to be recognized by the end
of 2021 using the straight-line method
8. Stockholders Equity
Charter Amendment
In June 2017, our stockholders approved
an amendment to our certificate of incorporation to increase the number of authorized shares of common stock to 300,000,000. Other than the change to the number of authorized shares of common stock, there were no changes to the terms of our common
stock.
Equity Offering
In February 2017, we
completed a public offering generating net proceeds of approximately $20.9 million through the issuance of 22,772,300 shares of common stock at an offering price of $1.01 per share.
Equity Purchase Agreement
We currently have in place an
equity purchase agreement with Aspire Capital Fund LLC (Aspire Capital) that was entered into in December 2015 and provides that Aspire Capital is committed to purchase shares of our common stock up to an aggregate amount of
$30.0 million over a three-year term, subject to our election to sell any such shares. We filed a registration statement for the resale of 16,600,000 shares of common stock in connection with the equity facility. During the three-month period
ended September 30, 2017, we sold 3,700,000 shares to Aspire Capital under the equity purchase agreement, generating aggregate proceeds of $6.6 million. During the nine-month period ended September 30, 2017, we sold 5,350,000 shares
to Aspire Capital under the equity purchase agreement, generating aggregate proceeds of $9.0 million.
12
9. Warrant Liabilities
As of September 30, 2017, we had no warrants outstanding. All of our previously outstanding warrants were either exercised prior to expiration or expired
in March 2017. We received proceeds of $1.9 million in the first quarter of 2017 from warrant exercises. Prior to their expiration, we accounted for common stock warrants as either liabilities or as equity instruments depending on the specific
terms of the warrant agreement. Registered common stock warrants that could require cash settlement were accounted for as liabilities and classified on the consolidated balance sheet as a
non-current
liability. The warrant liabilities were revalued at fair value at each balance sheet date subsequent to the initial issuance, and changes in the fair market value of the warrants were reflected in the consolidated statement of operations as income
(expense) from change in fair value of warrants.
10. Income Taxes
We have U.S. federal net operating loss and research and development tax credit carryforwards, as well as state and city net operating loss carryforwards,
which may be used to reduce future taxable income and tax liabilities. We also have foreign net operating loss and tax credit carryforwards, and the foreign net operating losses do not expire. Substantially all of our deferred tax assets have been
fully offset by a valuation allowance due to our cumulative losses. We recognize refundable tax benefits related to research and development credits associated with one of our foreign subsidiary.
The utilization of net operating loss and tax credit carryforwards generated prior to October 2012 is substantially limited under Section 382 of the
Internal Revenue Code of 1986, as amended, as a result of our October 2012 equity offering. We generated U.S. federal net operating loss carryforwards, research and development tax credits, and state and local net operating loss carryforwards since
2012. We will update our analysis under Section 382 prior to using these attributes.
11. Subsequent Events
License Agreement and Settlement
In October 2017, we
entered into an agreement with Garnet BioTherapeutics, Inc. (Garnet) to settle longstanding intellectual property disagreements between the parties. As a routine matter, we actively develop, improve, protect and defend our intellectual
property portfolio through prosecution efforts and contractual arrangements. Over the past several years, we have been involved in several proceedings in the United States and Europe involving Garnet, focused on stem cell technologies. As part of
the agreement, we have been granted a license to Garnet patents and applications that have been at the core of the intellectual property dispute, for use related to the treatment or prevention of disease or conditions using cells. In return, we have
agreed not to enforce our intellectual property rights against Garnet with respect to therapeutic agents derived from cells (but we fully retain our ability to enforce our rights with respect to cells used as therapy). We also agreed not to further
challenge the patentability or validity of certain Garnet applications or patents (noting that we have been granted a license, as described above). We initially paid Garnet $500,000 and issued 1,000,000 shares of our common stock in connection with
the execution of the agreement, and we will pay an additional $250,000 over each of the next four quarters. Additionally, we will issue 500,000 shares of common stock upon issuance of a patent from the Garnet patent applications at the core of the
dispute. There will be no royalty payments or milestone payments to Garnet associated with the development and commercialization of our cell therapy products or other payments to Garnet related to the settlement agreement.
13
Item 2.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations.
|
This
discussion and analysis should be read in conjunction with our unaudited financial statements and notes thereto included in this Quarterly Report on Form
10-Q
and the audited financial statement and notes
thereto included in our Annual Report on Form
10-K
for the year ended December 31, 2016. Operating results are not necessarily indicative of results that may occur in future periods.
Overview and Recent Developments
We are an international
biotechnology company that is focused primarily in the field of regenerative medicine. Our MultiStem
®
cell therapy, a patented and proprietary allogeneic stem cell product, is our lead
platform product and is currently in later-stage clinical development. Our current clinical development programs are focused on treating neurological conditions, cardiovascular disease, inflammatory and immune disorders, certain pulmonary conditions
and other conditions where the current standard of care is limited or inadequate for many patients.
Current Programs
By applying our proprietary MultiStem cell therapy product, we established therapeutic product development programs treating neurological conditions,
cardiovascular disease, inflammatory and immune disorders, and other conditions. Our programs in the clinical development stage include the following:
|
|
|
Ischemic Stroke
: We completed our Phase 2 study of MultiStem treatment of patients suffering a moderate to severe ischemic stroke and announced the
one-year
follow-up
data and final results from the study in February 2016. We are actively engaged in advancing the next stage of clinical development of this program, both independently and with HEALIOS K.K., or Healios.
|
In September 2016, we announced that we received agreement from the U.S. Food and Drug Administration, or
FDA, under a Special Protocol Assessment, or SPA, for the design and planned analysis of a pivotal Phase 3 clinical trial of MultiStem cell therapy for the treatment of ischemic stroke. The SPA provides agreement from the FDA that the protocol
design, clinical endpoints, planned conduct and statistical analyses encompassed in Athersys planned Phase 3 study are acceptable to support a regulatory submission for approval of the MultiStem product for treating ischemic stroke patients.
If the trial is successful, we believe the results from our Phase 3
MASTERS-2
clinical trial, together with other available clinical data, would provide the foundation of the regulatory package to be submitted
for marketing approval. In May 2017, we announced that the FDA granted us Fast Track designation for our clinical product for the treatment of ischemic stroke. Such designation for a new biologic product means that the FDA will take such actions as
are appropriate to expedite the development and review of our application to approve the product, and specifically, under Fast Track designation, the program becomes eligible for rolling submission, accelerated approval and priority review of the
biologics license application, facilitating a timely regulatory review. Also, in August 2017, we announced that the design of
MASTERS-2
received a Final Scientific Advice positive opinion from the European
Medicines Agency, or EMA, representing EMAs agreement that successful results from the trial could result in commercialization of the MultiStem therapy. This positive opinion provides further alignment among the key regulators regarding
potential commercialization of the MultiStem product upon success of this single pivotal trial. We also recently received the Regenerative Medicine Advanced Therapy, or RMAT, designation from the FDA, which was established this year under the 21
st
Century Cures Legislation.
14
The RMAT designation may be obtained for eligible cell therapy and other regenerative medicine and advanced therapies when the FDA agrees that preliminary clinical evidence indicates that the
therapy has demonstrated the potential to address unmet medical needs for a serious or life threatening disease or condition. The designation enables sponsors to discuss with the FDA multidisciplinary strategic development plans, including
expediting manufacturing development plans for commercialization to support priority review and accelerated approval
In
September 2016, we announced the successful completion of the Pharmaceutical and Medical Devices Agency, or PMDA, review of Healios Clinical Trial Notification, or CTN, allowing Healios to commence its confirmatory clinical trial, TREASURE,
evaluating the safety and efficacy of administration of MultiStem cell therapy for the treatment of ischemic stroke in Japan, which will be evaluated under the new regulatory framework for regenerative medicine therapies. In accordance with the
regulatory system in Japan, a CTN is equivalent to an Investigational New Drug, or IND, application under the regulatory system used in the United States, or U.S. This clinical trial to be conducted in Japan is part of a partnership and license
agreement between Healios and Athersys, focused on the development and commercialization of MultiStem in Japan for the treatment of ischemic stroke, and potentially other indications. The study design was accepted as proposed to PMDA in the CTN.
Our
MASTERS-2
clinical trial will be a randomized, double-blind,
placebo-controlled clinical trial designed to enroll 300 patients in North America and Europe who have suffered moderate to moderate-severe ischemic stroke. The enrolled subjects will receive either a single intravenous dose of MultiStem cell
therapy or placebo, administered within
18-36
hours of the occurrence of the stroke, in addition to the standard of care. The primary endpoint will evaluate disability using modified Rankin Scale, or mRS,
scores at three months, comparing the distribution, or the shift between the MultiStem treatment and placebo groups. The mRS shift analyzes patient improvement across the full disability spectrum, enabling recognition of improvements in
disability and differences in mortality and other serious outcomes, among strokes of different severities. The study will also assess Excellent Outcome (the achievement of mRS
£
1, NIHSS
£
1, and Barthel Index
³
95) at three months and one year as key secondary endpoints. Additionally, the study will consider other measures of functional recovery,
biomarker data and clinical outcomes, including hospitalization, mortality and life-threatening adverse events, and post-stroke complications such as infection.
Healios TREASURE study in Japan is a randomized, double-blind, placebo-controlled clinical trial conducted at hospitals
in Japan that have extensive experience at providing care for stroke victims. Based on the experience from our
B01-02
study, subjects enrolled in the trial will receive either a single dose of MultiStem or
placebo, administered within 1836 hours of the occurrence of the stroke, in addition to standard of care. The study will evaluate patient recovery through approximately 90 days following initial treatment based on Excellent Outcome and other
neurological, functional and clinical endpoints. The TREASURE study had been initiated earlier in 2017, though interruption in media supply at our contract manufacturer, Lonza, affected manufacturing of the MultiStem product and had slowed the
launch of the Japan study. The TREASURE study has recently been reinitiated, following a brief interruption to resupply placebo that was out of specification. Further interruptions in material supply or product manufacturing could constrain product
supply and slow the progress of the clinical study.
We are preparing to launch our
MASTERS-2
clinical trial, but the precise timing for the initiation will depend on the completion of trial preparations, including the manufacture of clinical product, and ongoing business development
discussions related to our stroke program. We will provide updates as we move forward with these plans. We then look forward to using the accelerated pathway afforded to us by the regulators in the U.S., Europe and Japan upon study completion.
15
|
|
|
Acute Myocardial Infarction
: We are conducting an ongoing Phase 2 clinical study in the U.S. for the administration of MultiStem cell therapy to patients that have suffered an acute myocardial infarction, or AMI.
In a Phase 1 clinical study, we previously evaluated the administration of MultiStem to patients that suffered an AMI. The results of this study demonstrated a favorable safety profile and encouraging signs of improvement in heart function among
patients that exhibited severely compromised heart function prior to treatment. This data was published in a leading peer reviewed scientific journal, and
one-year
follow-up
data suggested that the benefit observed was sustained over time. We were awarded in 2013 a grant for up to $2.8 million in funding to support the advancement of this clinical program, and we
launched a double-blind, sham-controlled Phase 2 clinical study, evaluating the safety and efficacy of MultiStem treatment in subjects who have a
non-ST
elevated myocardial infarction. The study is currently
enrolling patients and is being conducted at leading cardiovascular centers in the U.S. We continue to take steps to improve enrollment rates that have been below our expectations, and when we are in a position to do so, we will provide further
information about the anticipated timing of study completion.
|
|
|
|
Acute Respiratory Distress Syndrome
: We have also initiated a clinical study for the treatment of acute respiratory distress syndrome, or ARDS, in the United Kingdom and in the U.S. We were awarded a grant from
Innovate UK for up to approximately £2.0 million (of which £0.75 million is our portion) as partial support of a Phase 1/2 clinical study evaluating the administration of MultiStem cell therapy to ARDS patients. ARDS is a
serious immunological and inflammatory condition characterized by widespread inflammation in the lungs that severely compromises pulmonary function, requiring patients to be placed on a ventilator. ARDS can be triggered by pneumonia, sepsis, or
other trauma and represents a major cause of morbidity and mortality in the critical care setting. The Phase 1/2 clinical trial is ongoing, and our objective is to make substantial progress in patient accrual through this upcoming winter season, and
complete enrollment, if possible.
|
|
|
|
Hematopoietic Stem Cell Transplant / GvHD
: We completed a Phase 1 clinical study of the administration of MultiStem cell therapy to patients suffering from leukemia or certain other blood-borne cancers, in which
patients undergo radiation therapy and then receive a hematopoietic stem cell transplant. Such patients are at significant risk for serious complications, including
graft-vs-host
disease, or GvHD. Data from the study suggested that the treatment may have a beneficial effect in reducing the incidence and severity of GvHD, as well as
providing other benefits. We were granted orphan drug designation by the FDA and the EMA for MultiStem treatment in the prevention of GvHD, and the MultiStem product was granted Fast Track designation by the FDA for prophylaxis therapy against GvHD
following hematopoietic cell transplantation. Subsequently, our registration study design received a positive opinion from the EMA through the SA procedure, as well as a SPA designation from the FDA. Currently, this program is staged for future
registration-directed development dependent on the achievement of certain business development and financial objectives and the development and success of alternative therapies for treating the underlying conditions leading to transplant.
|
MultiStem therapy has been evaluated in other disease areas, such as inflammatory bowel disease with a collaborator, solid organ transplant
in an investigator-sponsored study, and a limited number of compassionate use cases.
While development of our clinical programs
for human health indications remains our priority, based on our research to date and work performed at our wholly-owned subsidiary, we are also evaluating our cell therapy for use in treating diseases and conditions in the animal health segment. We
have demonstrated in preclinical animal health models that our cell therapy can promote tissue repair and healing that could provide meaningful benefits to animal patients, including those suffering from conditions with unmet medical need. In
January 2017, we entered into an evaluation and option agreement with a global leader in the animal health business segment to evaluate our cell therapy technology for application in an undisclosed animal health area. We received a payment in
exchange for an exclusive period to evaluate our cell therapy technology with an option to negotiate for a license for the development and commercialization of the technology for the animal health area. The evaluation of our technology for this
application is currently ongoing.
16
We are engaged in preclinical development and evaluation of MultiStem therapy in other indications, focusing on
the neurological, cardiovascular and inflammatory and immune disease areas, and we conduct such work both through our own internal research efforts and through a broad global network of collaborators. We are routinely in discussions with third
parties about collaborating in the development of MultiStem therapy for various programs and may enter into one or more business partnerships to advance these programs over time.
While the MultiStem product platform continues to advance, we are engaged in process development initiatives intended to increase manufacturing scale, reduce
production costs, and enhance process controls and product quality, among other things. These initiatives are being conducted both internally and outsourced to select contractors, and the related investments are meant to enable us to meet potential
commercial demand in the event of eventual regulatory approval. Until such time as we are able to manufacture products ourselves in accordance with good manufacturing practices, we will continue to rely on third party manufacturers to make our
MultiStem product for clinical trials and eventual commercial sales. These third parties may not deliver sufficient quantities of our MultiStem product, manufacture MultiStem product in accordance with specifications, or comply with applicable
government regulations. From time to time, such third party manufacturers, or their material suppliers, may experience production delays, stoppages or interruptions in supply, which may affect the initiation, execution and timing of completion of
clinical trials or commercial activities.
In January 2016, we entered into a license agreement with Healios to develop and commercialize MultiStem cell
therapy for ischemic stroke in Japan, and to provide Healios with access to our proprietary technologies for use in Healios proprietary organ bud program, initially for transplantation to treat liver disease or dysfunction. Under
the agreement, Healios also obtained a right to expand the scope of the collaboration to include the exclusive rights to develop and commercialize MultiStem for the treatment of two additional indications in Japan, which include ARDS and another
indication in the orthopedic area, as well as all indications for the organ bud program. Healios is working toward the development and commercialization of the MultiStem product in Japan, and we are providing the manufactured product to
Healios for its clinical studies; provided, that, if we fail to perform our responsibilities to supply clinical trial product to Healios, then under certain circumstances, we may be required to grant Healios a license to make the product solely for
use in the licensed field in Japan.
We also have a collaboration with RTI Surgical, Inc., or RTI, for the development of products for certain orthopedic
applications using our stem cell technologies in the bone graft substitutes market, and we continue to receive royalty revenue from product sales and may receive other payments, from time to time, upon the successful achievement of certain
commercial milestones. The first commercial milestone was achieved in the first quarter of 2017, with a payment in the amount of $1.0 million.
Financial
In February 2017, we completed a public
offering generating net proceeds of approximately $20.9 million through the issuance of 22,772,300 shares of common stock at an offering price of $1.01 per share.
In connection with our January 2016 license agreement with Healios, we received a
non-refundable
up-front
cash payment of $15 million from Healios, and the collaboration can be expanded at Healios election. If Healios expands the collaboration, we will be entitled to receive an additional cash
payment of $10 million, royalties from product sales, success-based development, regulatory approval and sales milestones, and payments for product supply for the additional indications. We are also entitled to receive a fractional royalty
percentage on net sales of the organ bud products.
17
For the ischemic stroke indication, we may receive additional success-based development, regulatory approval and
sales milestones and tiered royalties on product sales, starting in the low double digits and increasing incrementally into the high teens depending on net sales levels. Additionally, we receive payments for product supplied to Healios under a
manufacturing supply agreement, which is initially focused on clinical product supply, and in 2017, we agreed to a cost-sharing arrangement with Healios for clinical product for its TREASURE trial in Japan that may impact the amount of proceeds we
receive from future milestones. Also in 2017, we entered into a services agreement with Healios related to the establishment of a contract manufacturer in Japan to produce product for Healios.
In 2016, a flood caused damage to our primary facilities that required the reconstruction of certain laboratory space and was covered by insurance at
replacement cost. Insurance recovery proceeds were recognized in the consolidated statement of operations and comprehensive loss.
Results of
Operations
Since our inception, our revenues have consisted of license fees, contract revenues and milestone payments from our collaborators, and
grant proceeds primarily from federal, state and foundation grants. We have derived no revenue from the commercial sale of therapeutic products to date, but we receive royalties on commercial sales by a licensee of products using our technologies.
Research and development expenses consist primarily of external clinical and preclinical study fees, manufacturing costs, salaries and related personnel costs, legal expenses resulting from intellectual property prosecution processes, facility
costs, and laboratory supply and reagent costs. We expense research and development costs as they are incurred. We expect to continue to make significant investments in research and development to enhance our technologies, advance clinical trials of
our product candidates, expand our regulatory affairs and product development capabilities, conduct preclinical studies of our product and manufacture our product candidates. General and administrative expenses consist primarily of salaries and
related personnel costs, professional fees and other corporate expenses. We expect to continue to incur substantial losses through at least the next several years.
Three Months Ended September 30, 2017 and 2016
Revenues
. Revenues increased slightly to $0.4 million for the three months ended September 30, 2017 compared to $0.3 million for the
three months ended September 30, 2016 due to an increase of $0.1 million in grant revenues.
Our grant revenues fluctuate from period to period based on the timing of grant-related activities and the award and expiration of new
grants.
Research and Development Expenses.
Research and development expenses increased to $5.4 million for the three months ended
September 30, 2017 from $5.3 million in the comparable period in 2016. The $0.1 million increase is primarily comprised of an increase in preclinical and clinical development costs of $0.8 million offset by decreases in internal
research supplies of $0.4 million, a decrease in sponsored research costs of $0.2 million and a decrease in travel costs of $0.1 million. The increase in our clinical and preclinical costs is primarily due to increased process
development activities to support large-scale manufacturing, and clinical product manufacturing costs during the period, partially offset by a decrease in costs for our stroke
B01-02
study that concluded in
the spring of 2016. Our clinical development, manufacturing and process development costs vary over time based on clinical manufacturing campaigns, the timing and stage of clinical trials underway, and manufacturing process development activities.
Other than external expenses for our clinical and preclinical programs, we do not track our research expenses by project; rather, we track such expenses by the type of cost incurred.
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General and Administrative Expenses.
General and administrative expenses increased to
$2.1 million for the three months ended September 30, 2017 from $1.8 million in the comparable period in 2016. The $0.3 million increase was due primarily to an increase of $0.1 million in personnel costs compared to the
same period in 2016, an increase in stock-based compensation of $0.1 million and a $0.1 million increase in other administrative costs.
Depreciation
. Depreciation expense increased to $177,000 for the three months ended September 30, 2017 from $114,000 in the comparable period in
2016. The increase related primarily to assets placed in service in the latter half of 2016 as a result of flood repairs, and equipment purchased for use in manufacturing process development activities. As a result of these additions, we expect our
depreciation to increase in 2017 as compared to 2016.
Gain from Insurance Proceeds, net
. No insurance recoveries were recognized during the three
months ended September 30, 2017. The net insurance recovery gain of $0.7 million during the three months ended September 30, 2016 included the cumulative losses associated with May 2016 flood damage (e.g., removal, disposal,
clean-up,
insurance deductible) and the cumulative insurance proceeds received. The net amount reflects a gain as of September 30, 2016 since most of the replacement cost was capitalized as leasehold
improvements.
Income (expense) from Change in Fair Value of Warrants, net
. We had no income recognized during the three months ended
September 30, 2017 for the market value change in our warrant liabilities, since as of March 31, 2017, all of our warrants were either exercised or expired. For the comparable period of 2016, we had $0.2 million of income reflecting
primarily changes in our stock price.
Other Income, net.
Other income, net, generally includes net foreign currency gains and losses, and net
interest income and expense.
Income Tax Benefit.
The income tax benefit in 2017 and 2016 represents refundable foreign tax credits.
Nine Months Ended September 30, 2017 and 2016
Revenues
. Revenues decreased to $2.5 million for the nine months ended September 30, 2017 from $16.3 million in the comparable period in
2016, reflecting the upfront license fee of $15.0 million from our Healios collaboration in the first quarter of 2016, partially offset by a milestone payment from RTI of $1.0 million in the second quarter of 2017.
Research and Development Expenses.
Research and development expenses decreased to $15.7 million for the nine months ended September 30,
2017 from $17.8 million in the comparable period in 2016. The increase of $2.1 million related primarily to a decrease of $0.9 million in internal research supplies, a decrease of $0.4 million in preclinical and clinical
development costs, a decrease in sponsored research costs of $0.4 million, a decrease in license fees of $0.3 million and a decrease in travel costs of $0.2 million. The decrease in our clinical and preclinical costs is primarily due
to decreased process development activities to support large-scale manufacturing, and clinical product manufacturing costs. The decrease in research supplies was due to a decrease in internal process development activities. Other than external
expenses for our clinical and preclinical programs, we do not track our research expenses by project; rather, we track such expenses by the type of cost incurred.
General and Administrative Expenses.
General and administrative expenses increased to $6.4 million for the nine months ended
September 30, 2017 from $5.8 million in the comparable period in 2016. The $0.6 million increase was due primarily to an increase in salary and benefits, other outside services, professional fees and stock-based compensation compared
to the same period in 2016.
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Depreciation
. Depreciation expense increased to $0.5 million for the nine-month period ended
September 30, 2017 compared to $0.2 million for the period ended September 30, 2016. The increase related primarily to assets placed in service in the latter half of 2016 as a result of flood repairs, and equipment purchased for use
in manufacturing process development activities. As a result of these additions, we expect our depreciation to increase in 2017 as compared to 2016.
Gain from Insurance Proceeds, net
. No insurance recoveries were recognized during the nine months ended September 30,
2017. The net insurance recovery gain of $0.7 million during the nine months ended September 30, 2016 included the cumulative losses associated with May 2016 flood damage (e.g., removal, disposal,
clean-up,
insurance deductible) and the cumulative insurance proceeds received. The net amount reflects a gain as of September 30, 2016 since most of the replacement cost was capitalized as leasehold
improvements.
Income (expense) from Change in Fair Value of Warrants, net
. Income of $0.7 million was recognized during the nine months ended
September 30, 2017 for the market value change in our warrant liabilities, compared to $1.7 million expensed in the comparable period in 2016, reflecting primarily changes in our stock price.
Other Income, net.
Other income, net, was $155,000 for the nine-month period ended September 30, 2017 and $228,000 for the comparable 2016
period, and is typically comprised of interest income and expense, foreign currency gains and losses, and tax credits. However, we recognized other income of $190,000 from a loan that was forgiven in the first quarter of 2016.
Income Tax Benefit.
The income tax benefit in 2017 and 2016 represents refundable foreign tax credits.
Liquidity and Capital Resources
Our sources of liquidity
include our cash balances and any
available-for-sale
securities. At September 30, 2017, we had $28.2 million in cash and cash equivalents. We have primarily
financed our operations through business collaborations, grant funding and equity financings. We conduct all of our operations through our subsidiary, ABT Holding Company. Consequently, our ability to fund our operations depends on ABT Holding
Companys financial condition and its ability to make dividend payments or other cash distributions to us. There are no restrictions, such as government regulations or material contractual arrangements, that restrict the ability of ABT Holding
Company to make dividend and other payments to us.
We have incurred losses since inception of our operations in 1995 and had an accumulated deficit of
$338 million at September 30, 2017. Our losses have resulted principally from costs incurred in research and development, clinical and preclinical product development, acquisition and licensing costs and general and administrative costs
associated with our operations. We used the financing proceeds from equity and debt offerings and other sources of capital to develop our technologies, to discover and develop therapeutic product candidates, develop business collaborations and to
acquire certain technologies and assets.
In February 2017, we completed a public offering generating net proceeds of approximately $20.9 million
through the issuance of 22,772,300 shares of common stock at an offering price of $1.01 per share.
We have an equity purchase agreement with Aspire
Capital Fund, LLC, or Aspire Capital, whereby Aspire Capital is committed to purchase up to an aggregate of $30 million of shares of our common stock over a three-year period ending in January 2019, subject to our election to sell any such
shares.
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Under the agreement, we have the right to sell shares, subject to certain volume limitations and a minimum floor price, at a modest discount to the prevailing market price. During the three-month
period ended September 30, 2017, we generated proceeds aggregating $6.6 million from sales of our common stock to Aspire Capital.
In connection
with our January 2016 license agreement with Healios, we received an
up-front
cash payment of $15 million from Healios, and the collaboration can be expanded at Healios election. If Healios expands
the collaboration, we will be entitled to receive an additional cash payment of $10 million, royalties from product sales, success-based development, regulatory approval and sales milestones, and payments for product supply for the additional
indications. Healios may exercise its option to expand the collaboration after the receipt of the initial results from Athersys ongoing ARDS clinical trial. We are also entitled to receive a fractional royalty percentage
on net sales of the organ bud products.
For the ischemic stroke indication, we may also receive success-based development and regulatory
approval milestones potential sales milestones from Healios and tiered royalties on product sales, starting in the low double digits and increasing incrementally into the high teens depending on net sales levels. Additionally, we receive payments
for product supplied to Healios under a manufacturing supply agreement, which is initially focused on clinical product supply, and in 2017, we agreed to a cost-sharing arrangement with Healios for clinical product for its TREASURE trial in Japan
that may impact the amount of proceeds we receive from future milestones.
Under the terms of our RTI agreement, we are eligible to receive cash payments
aggregating up to $35.5 million upon the successful achievement of certain commercial milestones. The first commercial milestone was achieved in the first quarter of 2017 in the amount of $1.0 million, which we received in April 2017.
However, there can be no assurance that additional milestones will be achieved. In addition, we continue to receive tiered royalties on worldwide commercial sales of implants using our technologies based on a royalty rate starting in the
mid-single
digits and increasing into the
mid-teens.
We remain entitled to
receive license fees for targets that were delivered to Bristol-Myers Squibb under our completed 2001 collaboration, as well as milestone payments and royalties on compounds developed by Bristol-Myers Squibb using our technology, though there can be
no assurance that we will achieve any such milestones or royalties. Bristol-Myers Squibb still has a few active programs using our cell lines, and during 2016, we received a $0.6 million milestone payment related to this collaboration.
We are obligated to pay the University of Minnesota a sublicense fee or a royalty based on worldwide commercial sales of licensed products if covered by a
valid licensed patent. The low single-digit royalty rate may be reduced if third-party payments for intellectual property rights are necessary or commercially desirable to permit the manufacture or sale of the product. As of September 30, 2017,
we have paid no royalties to the University of Minnesota and have paid sublicense fees from
time-to-time
in connection with our collaborations. In connection with our
expanding intellectual property portfolio, we periodically enter into other academic license agreements, which are typically specific to patents in a specific field.
In 2015, we and another company were awarded a grant from Innovate UK as partial support of our Phase 1/2 clinical study evaluating the administration of
MultiStem cell therapy to ARDS patients. The grant is expected to provide up to approximately £2.0 million in support (of which £0.75 million is our portion) over the course of the study, the majority of which has been
received, and the study is currently enrolling patients.
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We will require substantial additional funding in order to continue our research and product development
programs, including preclinical evaluation and clinical trials of our product candidates and manufacturing process development. At September 30, 2017, we had available investments and cash and cash equivalents of $28.2 million, and we
intend to meet our short-term liquidity needs with available cash. Over the longer term, we will make use of available cash, but will have to continue to generate additional funding to meet our needs, through business development, achievement of
milestones under our collaborations, and grant-funding opportunities. Additionally, we may raise capital from time to time through our equity purchase agreement with Aspire Capital, subject to its volume and price limitations. We also manage our
cash by deferring certain discretionary costs and staging certain development costs to extend our operational runway, as needed. Over time, we may consider the sale of additional equity securities, or possibly borrowing from financing institutions.
Our capital requirements over time depend on a number of factors, including progress in our clinical development programs, our clinical and preclinical
pipeline of additional opportunities and their stage of development, additional external costs such as payments to contract research organizations and contract manufacturing organizations, additional personnel costs and the costs in filing and
prosecuting patent applications and enforcing patent claims. The availability of funds impacts our ability to advance multiple clinical programs concurrently, and any shortfall in funding could result in our having to delay or curtail research and
development efforts. Further, these requirements may change at any time due to technological advances, business development activity or competition from other companies. We cannot assure you that adequate funding will be available to us or, if
available, that it will be available on acceptable terms.
We expect to continue to incur substantial losses through at least the next several years and
may incur losses in subsequent periods. The amount and timing of our future losses are highly uncertain. Our ability to achieve and thereafter sustain profitability will be dependent upon, among other things, successfully developing, commercializing
and obtaining regulatory approval or clearances for our technologies and products resulting from these technologies.
Cash Flow Analysis
Net cash used in operating activities was $17.9 million for the nine months ended September 30, 2017 and $4.6 million for the nine months ended
September 30, 2016, reflecting the approximately $15 million of cash received from Healios in January 2016, the $1.0 million commercial milestone received from RTI in April 2017, other contract and deferred revenues received in the
first half of 2017, and the variation in the use of cash to fund preclinical and clinical development activities. Net cash used in operating activities may fluctuate significantly on a
quarter-to-quarter
basis, as it has over the past several years, primarily due to the receipt of collaboration fees and payment of specific clinical trial costs, such as
clinical manufacturing campaigns, contract research organization costs and manufacturing process development projects.
Net cash used in investing
activities was $0.2 million and $12.2 million for the nine months ended September 30, 2017 and 2016, respectively. The decrease in the 2017 period related to a net decrease of $11.1 million of investment purchases, with the
remainder of the increase related to purchases of equipment primarily for our process development projects and as replacements for assets damaged in the 2016 flood damage. Purchases of equipment, net of insurance proceeds received, were
$0.2 million for the nine-month period ended September 30, 2017, compared to $1.1 million for the comparable prior year period.
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Financing activities provided cash of $31.5 million for the nine months ended September 30, 2017,
including $20.9 million of net proceeds from the February 2017 stock offering, equity sales to Aspire Capital under our equity purchase agreement and the exercise of common stock warrants, net of shares retained for withholding tax payments on
stock-based awards. Financing activities provided cash of $2.1 million for the nine months ended September 30, 2016 related primarily to equity sales to Aspire Capital under our equity purchase agreement and the exercise of common stock
warrants, net of shares retained for withholding tax payments on stock-based awards.
Off-Balance
Sheet
Arrangements
We have no
off-balance
sheet arrangements.
Critical Accounting Policies and Management Estimates
The Securities and Exchange Commission, or SEC, defines critical accounting policies as those that are, in managements view, important to the portrayal
of our financial condition and results of operations and demanding of managements judgment. Our discussion and analysis of financial condition and results of operations are based on our consolidated financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates on experience and on various assumptions that we believe are 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 those estimates. A description of these accounting policies
and estimates is included in Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form
10-K
for the year ended December 31,
2016. There have been no material changes in our accounting policies and estimates as described in our Annual Report on Form
10-K
for the year ended December 31, 2016. For additional information regarding
our accounting policies, see Note B to the Consolidated Financial Statements in our Annual Report on Form
10-K
for the year ended December 31, 2016.
Cautionary Note on Forward-Looking Statements
This
Quarterly Report on Form
10-Q
contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. These forward-looking
statements relate to, among other things, the expected timetable for development of our product candidates, our growth strategy, and our future financial performance, including our operations, economic performance, financial condition, prospects,
and other future events. We have attempted to identify forward-looking statements by using such words as anticipates, believes, can, continue, could, estimates,
expects, intends, may, plans, potential, should, suggest, will, or other similar expressions. These forward-looking statements are only predictions and
are largely based on our current expectations. These forward-looking statements appear in a number of places in this Quarterly Report on Form
10-Q.
In addition, a number of known and unknown risks, uncertainties, and other factors could affect the accuracy of these statements. Some of the more significant
known risks that we face are the risks and uncertainties inherent in the process of discovering, developing, and commercializing products that are safe and effective for use as human therapeutics, including the uncertainty regarding market
acceptance of our product candidates and our ability to generate revenues. These risks may cause our actual results, levels of activity, performance, or achievements to differ materially from any future results, levels of activity, performance, or
achievements expressed or implied by these forward-looking statements.
Other important factors to consider in evaluating our forward-looking statements
include:
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our ability to raise capital to fund our operations;
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the timing and nature of results from our MultiStem clinical trials, including the
MASTERS-2
Phase 3 clinical trial and the Healios TREASURE clinical trial in Japan;
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the possibility of delays in, adverse results of, and excessive costs of the development process;
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our ability to successfully initiate and complete clinical trials of our product candidates;
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the possibility of delays, work stoppages or interruptions in manufacturing by third parties or us, such as due to material supply constraints or regulatory issues;
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uncertainty regarding market acceptance of our product candidates and our ability to generate revenues, including MultiStem cell therapy for the treatment of stroke, AMI and ARDS, and the prevention of GvHD and other
disease indications;
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changes in external market factors;
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changes in our industrys overall performance;
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changes in our business strategy;
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our ability to protect and defend our intellectual property and related business operations, including the successful prosecution of our patent applications and enforcement of our patent rights, and operate our business
in an environment of rapid technology and intellectual property development;
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our possible inability to realize commercially valuable discoveries in our collaborations with pharmaceutical and other biotechnology companies;
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our ability to meet milestones and earn royalties under our collaboration agreements, including the success of our collaboration with Healios;
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our collaborators ability to continue to fulfill their obligations under the terms of our collaboration agreements;
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the success of our efforts to enter into new strategic partnerships and advance our programs, including, without limitation, in the United States, Europe and Japan;
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our possible inability to execute our strategy due to changes in our industry or the economy generally;
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changes in productivity and reliability of suppliers; and
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the success of our competitors and the emergence of new competitors.
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Although we currently believe that the
expectations reflected in the forward-looking statements are reasonable, we cannot guarantee our future results, levels of activity or performance. We undertake no obligation to publicly update forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by law. You are advised, however, to consult any further disclosures we make on related subjects in our reports on Forms
10-Q,
8-K
and
10-K
filed with or furnished to the SEC. You should understand that it is not possible to predict or identify all risk factors. Consequently, you should not consider
any such list to be a complete set of all potential risks or uncertainties.