10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014

Or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to            

Commission File Number: 001-32966

OSIRIS THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

Maryland	71-0881115
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
7015 Albert Einstein Drive, Columbia, Maryland	21046
(Address of principal executive offices)	(Zip Code)

443-545-1800

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o	Accelerated filer x
Non-accelerated filer o	Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o   No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at August 8, 2014
Common Stock, par value $0.001 per share	34,309,800

OSIRIS THERAPEUTICS, INC.

INDEX

		Page
PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited, except for the Condensed Balance Sheet as of December 31, 2013, which was derived from audited financial statements)	3
	Condensed Balance Sheets — June 30, 2014 and December 31, 2013	3
	Condensed Statements of Comprehensive Loss — three and six months ended June 30, 2014 and 2013	4
	Condensed Statement of Changes in Stockholders’ Equity— six months ended June 30, 2014	5
	Condensed Statements of Cash Flows — six months ended June 30, 2014 and 2013	6
	Notes to Condensed Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	25
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	25
Item 1A.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3.	Defaults Upon Senior Securities	25
Item 4.	Mine Safety Disclosures	25
Item 5.	Other Information	26
Item 6.	Exhibits	26
Signatures		26
Exhibit Index

2

PART I — FINANCIAL INFORMATION

Item 1.                   Financial Statements — Unaudited

OSIRIS THERAPEUTICS, INC.
CONDENSED BALANCE SHEETS

(amounts in thousands, except per share amounts)

	June 30, 2014			December 31, 2013
	(Unaudited)
Assets
Current assets:
Cash	$	2,658		$	2,416
Investments available for sale	45,759			39,508
Trading securities	15,584			17,086
Trade accounts receivable, net of reserves	16,890			7,459
Other receivables	256			15,265
Inventory	5,540			1,929
Prepaid expenses and other current assets	404			355
Current assets of discontinued operations	—			91
Total current assets	87,091			84,109
Property and equipment, net	1,895			1,896
Deferred tax asset	—			5,849
Restricted cash	223			243
Total assets	$	89,209		$	92,097
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	8,037		$	4,842
Capital lease obligations, current portion	45			45
Deferred tax liability	—			5,849
Current liabilities of discontinued operations	—			57
Total current liabilities	8,082			10,793
Other long-term liabilities	280			355
Total liabilities	8,362			11,148
Commitments and contingencies
Stockholders’ equity
Common stock, $.001 par value, 90,000 shares authorized, 34,310 shares outstanding - 2014, 34,114 shares outstanding - 2013	34			34
Additional paid-in-capital	285,745			282,702
Accumulated other comprehensive (loss) income	72			(33		)
Accumulated deficit	(205,004		)	(201,754		)
Total stockholders’ equity	80,847			80,949
Total liabilities and stockholders’ equity	$	89,209		$	92,097

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

3

OSIRIS THERAPEUTICS, INC.
STATEMENTS OF COMPREHENSIVE LOSS

Unaudited
(amounts in thousands, except per share data)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
Product revenues	$	13,290		$	5,291		$	23,344		$	9,346
Cost of product revenues	2,924			1,482			5,136			2,617
Gross profit	10,366			3,809			18,208			6,729
Operating expenses:
Research and development	1,055			1,132			1,725			2,089
Selling, general and administrative	9,341			4,157			16,576			6,560
Fees paid to related parties	36			—			185			62
Share based payments to related parties	—			—			403			180
	10,432			5,289			18,889			8,891
Loss from operations	(66		)	(1,480		)	(681		)	(2,162		)
Other income (expense), net	(1,232		)	25			(1,358		)	54
Loss from continuing operations, before income taxes	(1,298		)	(1,455		)	(2,039		)	(2,108		)
Income tax expense	(130		)	(358		)	—			—
Loss from continuing operations	(1,428		)	(1,813		)	(2,039		)	(2,108		)
Discontinued operations:
Loss from operations of discontinued operations, net of income taxes of $597 and $431, respectively, for the six months and three months ended June 30, 2014 and $0 and ($358) for the six months and three months ended June 30, 2013, respectively.
Loss from discontinued operations	(457		)	(1,944		)	(1,211		)	(4,383		)
Net loss	(1,885		)	(3,756		)	(3,250		)	(6,491		)
Other comprehensive income (loss)
Unrealized gain (loss) on investments available for sale	17			(91		)	105			(66		)
Comprehensive loss	$	(1,868	)	$	(3,847	)	$	(3,145	)	$	(6,557	)
Basic and diluted loss per share
Loss from continuing operations	$	(0.04	)	$	(0.06	)	$	(0.06	)	$	(0.06	)
Loss from discontinued operations	(0.01		)	(0.06		)	(0.04		)	(0.13		)
Basic and diluted loss per share	$	(0.05	)	$	(0.12	)	$	(0.10	)	$	(0.19	)
Weighted average common shares (basic and diluted)	34,264			32,958			34,207			32,935

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

4

OSIRIS THERAPEUTICS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the six months ended June 30, 2014

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

						Accumulated
				Additional		Other						Total
	Common Stock			Paid-in		Comprehensive			Accumulated			Stockholders’
	Shares	Amount		Capital		(Loss) Income			Deficit			Equity
Balance at January 1, 2014	34,114,603	$	34	$	282,702	$	(33	)	$	(201,754	)	$	80,949
Exercise of options to purchase common stock ($.40- $22.74 per share)	168,197	—		1,417		—			—			1,417
Share-based payment-director services ($7.73 per share)	27,000	—		403		—			—			403
Share-based payment-employee compensation	—	—		1,134		—			—			1,134
Net loss	—	—		—		—			(3,250		)	(3,250		)
Unrealized gain on investments available for sale	—	—		—		105			—			105
Windfall tax benefit from stock-based compensation	—	—		89		—			—			89
Balance at June 30, 2014	34,309,800	$	34	$	285,745	$	72		$	(205,004	)	$	80,847

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

5

OSIRIS THERAPEUTICS, INC.
STATEMENTS OF CASH FLOWS

Unaudited
(amount in thousands)

	Six months ended June 30,
	2014			2013
Cash flows from operating activities:
Continuing operations
Loss from continuing operations	$	(2,039	)	$	(2,108	)
Adjustments to reconcile loss from continuing operations to net cash used in operations of continuing operations:
Unrealized loss on trading securities	1,502			—
Depreciation and amortization	441			271
Non cash share-based payments	1,537			766
Provision for bad debts	50			(25		)
Changes in operating assets and liabilities:
Accounts receivable	(9,481		)	(3,349		)
Inventory	(3,611		)	(418		)
Prepaid expenses, and other current assets	(208		)	247
Lease reserves	(53		)	—
Accounts payable, accrued expenses, and other current liabilities	3,195			1,750
Net cash used in operating activities of continuing operations	(8,667		)	(2,866		)
Discontinued operations
Loss from discontinued operations	(1,211		)	(4,383		)
Adjustments to reconcile loss from discontinued operations to net cash used in operations of discontinued operations:
Depreciation and amortization	—			98
Changes in operating assets and liabilities:
Accounts receivable and other current assets	91			31
Accounts payable and accrued expenses	(57		)	38
Net cash used in operations of discontinued operations	(1,177		)	(4,216		)
Net cash used in operating activities	(9,844		)	(7,082		)
Cash flows from investing activities:
Purchases of property and equipment	(440		)	(298		)
Proceeds from sale of discontinued operations, net	15,000			—
Proceeds from sale of investments available for sale	8,307			6,600
Purchases of investments available for sale	(14,285		)	(54		)
Net cash provided by investing activities	8,582			6,248
Cash flows from financing activities:
Principal payments on capital lease obligations	(22		)	(22		)
Restricted cash	20			—
Proceeds from the exercise of options to purchase common stock	1,417			581
Windfall benefit from stock-based compensation	89			—
Net cash provided by financing activities	1,504			559
Net increase (decrease) in cash	242			(275		)
Cash at beginning of period	2,416			1,854
Cash at end of period	$	2,658		$	1,579

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

6

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

SIX MONTHS ENDED JUNE 30, 2014 AND 2013

1.  Description of Business and Significant Accounting Policies

Description of Business

Osiris Therapeutics, Inc. (“we,” “us,” “our,” or the “Company”) is a Maryland corporation headquartered in Columbia, Maryland. We began operations on December 23, 1992 and were a Delaware corporation until, with approval of our stockholders, we reincorporated as a Maryland corporation on May 31, 2010. We are a leading stem cell regenerative medicine company focused on developing and marketing products in the wound, orthopedic, and sports medicine markets.

From 2010 to 2013, we operated our business in two segments, Biosurgery and Therapeutics. We now operate only our Biosurgery business, as a result of the sale of our Therapeutics segment assets in the fourth quarter of 2013, as discussed further below. Our Biosurgery business focuses on products for wound care, cartilage repair, and orthopedics, to harness the ability of cells and novel constructs to promote the body’s natural healing. Until it was sold, our Therapeutics business focused on developing biologic stem cell drug candidates from a readily available and non-controversial source—adult bone marrow.

Our Biosurgery business has continued to grow since its inception, and we have increased our organizational focus on the development and commercialization of products in this segment. Consistent with this organizational focus, as discussed further in Note 2— Discontinued Operations, on October 10, 2013, we entered into a Purchase Agreement to sell our Therapeutics segment, including all of our culture expanded mesenchymal stem cell business, including Prochymal and other related assets. We eliminated the Therapeutics segment from our continuing operations as a result of the disposal transaction, and have presented the assets, liabilities, and results of the segment’s operations as a discontinued operation for all periods presented. Our continuing operations now represent the portion of our business previously referred to as our Biosurgery segment.

Unaudited Interim Financial Statements

Except for the Balance Sheet as of December 31, 2013, which was derived from audited financial statements, the accompanying condensed financial statements are unaudited.  The accompanying condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, these statements include all adjustments (consisting of normal recurring adjustments) considered necessary to present a fair statement of our results of operations, financial position and cash flows. Operating results for any interim period are not necessarily indicative of the results that may be expected for the full year. This Quarterly Report on Form 10-Q should be read in conjunction with our financial statements and footnotes included in our Annual Report on Form 10-K (“2013 10-K”) for the fiscal year ended December 31, 2013.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Due to the inherent uncertainty involved in making those assumptions, actual results could differ from those estimates. We believe that the most significant estimates that affect our financial statements are those that relate to deferred tax assets, inventory valuation, share-based compensation and the value of the derivative obtained in connection with the sale of our former Therapeutics business.

Reclassifications

We have reclassified certain prior-year amounts for comparative purposes. These reclassifications did not affect our results of operations or financial positions for the years presented.

Cash and Cash Equivalents

Amounts listed as cash on our balance sheets are maintained in depository accounts at a commercial bank. Cash and cash equivalents, which include highly liquid investments with maturities of three months or less when purchased, held in our brokerage investment accounts are classified as investments available for sale, as the amounts represent investments that have matured and are anticipated to be reinvested in debt securities in the near future, and are disclosed at fair value, which approximates cost.

7

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)

SIX MONTHS ENDED JUNE 30, 2014 AND 2013

1.Description of Business and Significant Accounting Policies - continued

Investments Available for Sale

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

Investments available for sale are evaluated periodically to determine whether a decline in their value is “other than temporary.” The term “other than temporary” is not intended to indicate a permanent decline in value. Rather, it means that the prospects for near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the security. We review criteria such as the magnitude and duration of the decline, as well as the reasons for the decline, to predict whether the loss in value is other than temporary. If a decline in value is determined to be other than temporary, the carrying value of the security is reduced and a corresponding charge to earnings is recognized.

Trading Securities - Derivative and Securities Received in Business Disposition

As discussed in Note 2 — Discontinued Operations, we disposed of our Therapeutics segment in October 2013.  A portion of the consideration for the sale of that business was stock of Mesoblast Limited (“Mesoblast”), the parent of the purchaser.  We are required to hold that stock for one year from the date of receipt.  We currently intend to dispose of the Mesoblast stock as soon as we are able to do so in December 2014.  As such, we have reflected the investment as a current asset in Trading Securities.  Mesoblast is a public company and its stock is traded on the Australian stock exchange.

The Mesoblast stock is subject to limited price protection for the one year required holding period. To the extent the value of those shares decreases during the holding period, Mesoblast is required to pay us for the decrease in value.  This payment is to be made at least one half in cash and at the option of Mesoblast, up to one half in additional shares of Mesoblast stock. Any additional Mesoblast stock will also have to be held for one year during which period there is no further price protection. The price protection is accounted for as a derivative under ASC 815, Derivatives and Hedging, and, as such is recorded on the balance sheet at fair value, with changes in value recognized in Other income (expense), net. We have elected to measure the Mesoblast stock at fair value with changes in fair value reflected in Other income (expense), net, as permitted under ASC 825-10, Financial Instruments — Fair Value Option.

Our only derivative instrument is the price protection guarantee regarding the payment received in restricted shares of Mesoblast stock.  We do not hold derivative financial instruments for trading purposes.

Restricted Cash

We periodically are required under the terms of various agreements to provide letters of credit which are collateralized by cash deposits. The restricted cash relates to a letter of credit that we caused to be issued in lieu of a security deposit under the operating lease for our Columbia, Maryland facility.

Trade Accounts Receivable

Trade accounts receivable are reported at their net realizable value. We charge off uncollectible receivables when the likelihood of collection is remote. We set credit terms with individual customers, and consider receivables outstanding longer than the time specified in the respective customer’s contract, typically 45-days, to be past due. As of June 30, 2014 and December 31, 2013, accounts receivable in the accompanying balance sheets are reported net of a $128,000 and $78,000 allowance for doubtful accounts, respectively. We believe the reported amounts are fully collectible. Trade accounts receivable balances are not collateralized. We incurred $50,000 of bad debt expense in the first half of fiscal 2014. We did not incur any bad debts expense in the first half of fiscal 2013.

Other Receivables

Other receivables include reimbursements due us from Mesoblast for goods and services provided to them in connection with the Transition Services Agreement entered into as part of the sale transaction.  The Transition Services Agreement has been extended so that we will provide some services to Mesoblast through October 10, 2014, and will continue to be reimbursed for the costs incurred. Other receivables also include accrued interest from the company’s investments and federal income tax refunds expected.

8

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)

SIX MONTHS ENDED JUNE 30, 2014 AND 2013

1.  Description of Business and Significant Accounting Policies - continued

Inventory

We began carrying inventory of our Biosurgery products on our balance sheet following commercial launch of such products. Inventory consists of raw materials, biologic products in process, and products available for distribution. We determine our inventory values using the first-in, first-out method. Inventory is valued at the lower of cost or market, and excludes units that we anticipate distributing for clinical evaluation. Materials and supplies purchased for product development and product improvement activities are expensed as incurred.

Property and Equipment

Property and equipment, including improvements that extend useful lives, are valued at cost, while maintenance and repairs are charged to operations as incurred. Depreciation is calculated using the straight-line method based on estimated useful lives ranging from three to seven years for furniture, equipment and internal use software. Leasehold improvements and assets under capital leases are amortized over the shorter of the estimated useful life of the asset or the term of the lease.

Valuation of Long-lived Assets

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

Biosurgery Revenue Recognition

We recognize revenue from product distribution when title passes to the customer.  Title usually passes when the product is shipped to the customer and leaves our loading dock.  In some situations, we store consigned inventory on site in freezers at hospital or clinic facilities and title  passes to the customer when the product is used in a surgical procedure.  In these instances we recognize the revenue upon notification of the completed surgical procedure.  We verify the condition and status of all consigned inventory on at least a quarterly basis.   Due to the nature of our products and the need to ensure they are maintained at the proper frozen temperature, we generally do not allow product returns.

Therapeutics Revenue Recognition

In our former Therapeutics business, we evaluated revenues from agreements that have multiple elements to determine whether the components of the arrangement represent separate units of accounting. To recognize a delivered item in a multiple element arrangement, the delivered items must have value on a standalone basis and the delivery or performance must be probable and within our control for any delivered items that have a right of return. The determination of whether multiple elements of a collaboration agreement meet the criteria for separate units of accounting requires us to exercise judgment. We account for the activities of our former Therapeutics business as discontinued operations.

Revenues from research licenses associated with our former Therapeutics business were recognized as earned upon either the incurring of reimbursable expenses directly related to the particular research plan or the completion of certain development milestones as defined within the terms of the agreement. Payments received in advance of research performance were designated as deferred revenue. Non-refundable upfront license fees and certain other related fees associated with our former Therapeutics business were recognized on a straight-line basis over the development periods of the contract deliverables. Fees associated with substantive at risk performance based milestones are recognized as revenue upon their completion, as defined in the respective agreements. Incidental assignment of technology rights were recognized as revenue when and if it was earned and received.

Research and Development Costs

We expense internal and external research and development (“R&D”) costs, including costs of funded R&D arrangements and the manufacture of clinical batches of Biosurgery products used in clinical trials, in the period incurred.

9

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)

SIX MONTHS ENDED JUNE 30, 2014 AND 2013

1.  Description of Business and Significant Accounting Policies - continued

Income Taxes

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

We recognize in our financial statements the impact of a tax position, if that position is more likely than not to be sustained upon an examination, based on the technical merits of the position. Interest and penalties related to income tax matters are recorded as income tax expense. At June 30, 2014 and December 31, 2013 we had no accruals for interest or penalties related to income tax matters.

Income per Common Share

Basic income per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted income per common share adjusts basic income per share for the potentially dilutive effects of common share equivalents, using the treasury stock method, and includes the incremental effect of shares that would be issued upon the assumed exercise of stock options and warrants.

Diluted loss per common share for the three and six months ended June 30, 2014 excludes all 1,536,945 of our outstanding options as of that date, as their impact on our net loss is anti-dilutive.

Diluted loss per common share for the three and six months ended June 30, 2013 excludes the 1,000,000 shares issuable upon the exercise of an outstanding warrant, and all 2,042,914 of our outstanding options as of that date, as their impact on our net loss is anti-dilutive.

Share-Based Compensation

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

We recognize all share-based payments to employees and non-employee directors in our financial statements based on their grant date fair values, calculated using the Black-Scholes option pricing model. Compensation expense related to share-based awards is recognized on a straight-line basis for each vesting tranche based on the value of share awards that are expected to vest on the grant date, which is revised if actual forfeitures differ materially from original expectations.

Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income and all changes in equity from non-stockholder sources, which consist of changes in unrealized gains and losses on investments.

Concentration of Risk

We maintain cash and short-term investment balances in accounts that exceed federally insured limits, although we have not experienced any losses on such accounts. We also invest excess cash in investment grade securities, generally with maturities of one year or less.

We have historically provided credit in the normal course of business to contract counterparties and to the distributors of our product. Trade accounts receivable in the accompanying balance sheets consist primarily of amounts due from end user customers and distributors of our Biosurgery products within the United States. During the first half of fiscal 2014 and 2013, revenues from one of the distributors of our Biosurgery products, Stability Biologics, comprised approximately 11% and 43%, respectively, of our total Biosurgery product revenues. As of June 30, 2014 and December 31, 2013, receivables from this distributor comprised 11% and 57%, respectively, of our trade receivables. We expect all of our reported receivables to be fully collected. As discussed under “Trade Accounts Receivable,” we have incurred $50,000 bad debt expense for the three months ended June 30, 2014. We did not incur any bad debts expense in the first half of fiscal 2013.

10

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)

SIX MONTHS ENDED JUNE 30, 2014 AND 2013

1.  Description of Business and Significant Accounting Policies - continued

Recently Adopted Accounting Guidance at June 30, 2014

In July 2013, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) related to the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists.  The ASU requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as either a reduction to a deferred tax asset or separately as a liability depending on the existence, availability and/or use of an operating loss carryforward, a similar tax loss, or a tax credit carryforward. This ASU was adopted at January 1, 2014. This ASU did not have an impact on our consolidated financial statements as we currently do not have any unrecognized tax benefits in the same jurisdictions in which we have tax loss or credit carryovers.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services.  The new standard will replace most of the existing revenue recognition standards in U.S. GAAP when it becomes effective on January 1, 2017.  Early adoption is not permitted.  The new standard can be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of the change recognized at the date of the initial application.  We are currently assessing the impact the adoption of ASU 2014-09 will have on our condensed consolidated financial position, results of operations and cash flows.

2. Discontinued Operations

On October 10, 2013, we entered into a Purchase Agreement with a wholly-owned subsidiary of Mesoblast Limited, pursuant to the terms of which we sold our culture expanded mesenchymal stem cell (ceMSC) business, including Prochymal and other related assets. The Purchase Agreement provides for payment to us of $50.0million in initial consideration, and payment of up to an additional $50.0 million upon the achievement by Mesoblast of certain clinical and regulatory milestones. Additionally, we will be entitled to earn low single to double digit cash royalties on future sales by Mesoblast of Prochymal and other products utilizing the acquired ceMSC technology.

The Purchase Agreement provides for the $50.0 million of initial payments and up to $50.0 million of contingent additional payments to us upon our achievement of milestone events, as follows:

	Amount
Milestone	($000)
Initial consideration
Letter of intent payments	$	3,500
Initial closing payment	16,500
Additional closing payment, received in April 2014	15,000
Delivery of all scheduled assets under the Transfer Agreement	15,000
Total initial consideration	50,000
Contingent Consideration
First marketing authorization received in the U.S.	20,000
First marketing authorization received from France, Germany, or European Union.	10,000
Completion of the enrollment of the Phase 3 Crohn’s Trial or Mesoblast’s election to discontinue the trial	10,000
Receipt of final data for the Crohn’s trial or first marketing approval for Crohn’s	10,000
Total conditional consideration	50,000
Total possible purchase price	$	100,000

Of the $50 million in total initial consideration, we had received at December 31, 2013, payments of $20 million in cash, and $15 million in Mesoblast ordinary shares, which were delivered to us upon completed delivery of the ceMSC assets.  The remaining $15 million of the initial consideration was received in cash on April 9, 2014.  The Mesoblast shares received by us are subject to a one year holding period from the date of receipt, but are afforded limited downside protection for a drop in the Mesoblast share price over the holding period.  We have evaluated this downside protection, and determined that it meets the criteria of a derivative instrument.  The fair value of the protection at the time of the disposition of our Therapeutics business was $1.7 million.  We recognized the price protection derivative as an asset at June 30, 2014 and December 31, 2013 at its then fair value of $3.2 million and $1.7 million respectively. The initial $1.7 million value of the derivative was reflected in the calculation of the gain on sale of the Therapeutics business.

11

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)

SIX MONTHS ENDED JUNE 30, 2014 AND 2013

2. Discontinued Operations - continued

Our ability to receive the second $50.0 million is subject to satisfaction of the milestones indicated above, all of which are largely dependent upon the clinical and regulatory success of Mesoblast and other factors not in our control. These include many, if not all, of the risks and uncertainties that our ceMSC business was subject to prior to its sale to Mesoblast, including product development, efficacy and regulatory risks. We have received no such payments thus far, nor do we have any expectation of receiving any such payments in the foreseeable future. Our ability to earn royalties from Mesoblast is subject to these same risks and will require performance by Mesoblast that results in its meeting some or all of the milestones referred to above, and is thereafter also dependent upon the commercial success of Mesoblast’s ceMSC business. Royalties, if any, are payable to us in cash. Any portion of the second $50.0 million that becomes payable to us will be payable, at the discretion of Mesoblast, in Mesoblast ordinary shares, based on a then current valuation of such shares.  Any such Mesoblast ordinary shares that we receive will also be subject to a one year holding period, with the same limited downside protection described above.

We eliminated the Therapeutics segment from our continuing operations as a result of the disposal transaction and have presented the assets, liabilities, and results of the segment’s operations as a discontinued operation for all periods.  Our continuing operations now represent the portion of our business previously referred to as our Biosurgery segment.

As a result of the disposal of our Therapeutics segment, we have presented the assets, liabilities, and results of the segment’s operations as a discontinued operation for all periods presented.  Our only continuing involvement in our former Therapeutics business is to wind down our prior research and development activities and to assist Mesoblast in absorbing this business under a Transition Services Agreement entered into as part of the Purchase Agreement. The only continuing cash flows to us related to our former Therapeutics business will be the contingent consideration and royalties provided for under the purchase agreement, as described above.  We received no such contingent payments or royalties in the second quarter of fiscal 2014 or full fiscal year 2013.

We recognized a gain of approximately $49.4 million of the sale of discontinued operations during the year ended December 31, 2013, representing the $50.0 million in initial payments received under the Purchase Agreement and the $1.7 million fair value of the derivative instrument received, net of transaction costs of approximately $600,000, including legal, accounting and advisory fees, and income tax expense of $1.7 million.

The net assets allocable to the Therapeutics business at June 30, 2014 and December 31, 2013 were as follows:

	June 30,2014		December 31, 2013
	($000s)		($000s)
Current assets:
Accounts receivable	$	—	$	91
Current liabilities:
Accounts payable and accrued expenses	$	—	$	57

Summarized operating results of discontinued operations are as follows:

	($000s)						($000s)
	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2014			2013			2014			2013
Revenue from collaborative research agreements and royalties	$	150		$	135		$	150		$	322
Operating expenses:
Research and development	104			2,196			$	177		4,220
Selling, general and administrative	72			241			587			485
	176			2,437			764			4,705
Loss income from discontinued operations before income tax expense	(26		)	(2,302		)	(614		)	(4,383		)
Income tax expense (benefit)	431			(358		)	597			—
Loss income from discontinued operations	$	(457	)	$	(1,944	)	$	(1,211	)	$	(4,383	)

12

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)

SIX MONTHS ENDED JUNE 30, 2014 AND 2013

2. Discontinued Operations - continued

Revenues from our former Therapeutics business have historically consisted primarily of collaborative research agreements and royalties. Because of the disposition of our Therapeutics business in 2013, we will no longer incur related research and development expenses related to these discontinued operations. Our discontinued operations earned royalty revenues and cost reimbursement under an adult expanded access program. Royalties were earned on the sale of human mesenchymal stem cells sold for research purposes. We recognized this revenue as sales were made.

3. Segment Reporting

Historically, we managed our business in two operating segments: our Biosurgery segment and our Therapeutics segment.

Our Biosurgery segment is focused on the development, manufacture and distribution of biologic products for wound care, cartilage repair, and orthopedics to harness the ability of cells and novel constructs to promote the body’s natural healing. We launched Grafix for commercial distribution in 2010, began distribution of Ovation in early fiscal 2011, and began distribution of Cartiform and OvationOS during 2013.  We have continued to increase our distribution volume of these products since their respective commercial launches and are developing additional products for future commercialization.

Our Therapeutics segment focused on developing and marketing products to treat medical conditions in the inflammatory and cardiovascular disease areas. Its operations have focused on clinical trials and discovery efforts.  As disclosed in Note 2 — Discontinued Operations, in October 2013 we entered into a Purchase Agreement with Mesoblast, pursuant to the terms of which we sold our culture expanded mesenchymal stem cell business, including Prochymal and other related assets.

Given the sale of our former Therapeutics segment, we now have only one operating segment.  As such, our financial statements present the assets, liabilities, and results of the former Therapeutics segment as discontinued operations for all periods presented, and our continuing operations now represent what was formerly our Biosurgery segment.

4. Property and Equipment

Property and equipment at June 30, 2014 and December 31, 2013 are as follows:

	June 30, 2014			December 31,
	2014			2013
	(000s)			(000s)
Laboratory and manufacturing equipment	$	975		$	663
Computer hardware, furniture and fixtures	1,067			899
Leased assets	228			228
Leasehold improvements	4,260			4,260
	6,530			6,050
Accumulated depreciation and amortization	(4,635		)	(4,154		)
Property and equipment, net	$	1,895		$	1,896

13

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)

SIX MONTHS ENDED JUNE 30, 2014 AND 2013

5. Inventory

As of June 30, 2014 and December 31, 2013, inventory for our Biosurgery business consists of the following:

	June 30,2014		December 31,2013
	($000)		($000)
Inventory
Raw materials and supplies	$	575	$	387
Work-in-process	519		22
Finished goods	4,446		1,520
Total Biosurgery inventory	$	5,540	$	1,929

Prior to the transaction described in Note 2—Discontinued Operations, we did not carry any inventory for our Therapeutics products, as we had yet to launch Prochymal for commercial distribution.

6. Share-Based Compensation

In April 2006, we adopted our 2006 Omnibus Plan. We amended and restated this plan in 2008 and 2010, and amended it further in 2012, in each case to, among other things, increase the number of shares available for grant. Most recently, as our 2014 Annual Meeting of Stockholders, held on May 6, 2014, an amendment to the Amended and Restated 2006 Omnibus Plan was approved that, among other things, increased the maximum number of shares that may be awarded under the Plan to 3,000,000 shares. In addition, we had previously established our Amended and Restated 1994 Stock Incentive Plan. Both Plans authorize the issuance of various forms of stock-based awards, including incentive and non-qualified stock options, stock purchase rights, stock appreciation rights and restricted and unrestricted stock awards. A total of 3,000,000 shares of our common stock have been reserved for issuance under the Amended and Restated 2006 Omnibus Plan, and 736,378 shares were reserved under our Amended and Restated 1994 Stock Incentive Plan. We ceased all grants under the Amended and Restated 1994 Stock Incentive Plan concurrent with our initial public offering in August 2006. As a result, no shares are currently available for future awards under the Amended and Restated 1994 Stock Incentive Plan. At June 30, 2014, there were 621,406 shares available for future awards under the Amended and Restated 2006 Omnibus Plan.

In connection with the stock options exercised during the three months ended June 30, 2014, we received cash proceeds of $1,417,000. At June 30, 2014,  there was $4.0 million of total unrecognized compensation costs related to non-vested stock options, which is expected to be recognized through fiscal 2018.

A summary of stock option activity for the three months ended June 30, 2014 is as follows:

			Weighted		Weighted
			Average		Average	Aggregate
	Number of		Exercise		Remaining	Intrinsic Value
	Shares		Price		Contractual Life	(in thousands)
Outstanding at January 1, 2014	1,233,767		$	10.61	6.3-years	$	2,224
Granted	739,000		$	14.98		$	—
Exercised	(168,197	)	$	8.43		$	1,083
Forfeited or canceled	(267,625	)	$	17.30		$	430
Balance, June 30, 2014	1,536,945		$	11.79	8.0-years	$	6,458
Exercisable at June 30, 2014	440,425		$	10.14	5.1-years	$	2,789

The weighted fair value of options granted during the six months ended June 30, 2014 was $7.85 per share.

14

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)

SIX MONTHS ENDED JUNE 30, 2014 AND 2013

7. Income Taxes

We calculate our interim tax provision in accordance with the guidance for accounting for income taxes in interim periods. At the end of each interim period, we estimate the annual effective tax rate and apply that tax rate to our ordinary quarterly pre-tax income from continuing operations. The tax expense or benefit related to significant, unusual or extraordinary discrete events (including discontinued operations) during the interim period is recognized in the interim period in which those events occurred. In addition, the effect of changes in enacted tax laws or rates or tax status is recognized in the interim period in which the change occurs.  For the six months ended June 30, 2014 and 2013, there was no income tax expense or benefit from continuing operations due to losses from both continuing operations and discontinued operations for which no benefit was provided.

8. Investments Available for Sale

Investments available for sale consisted of the following as of June 30, 2014 and December 31, 2013:

	June 30, 2014											December 31, 2013
	($000s)											($000s)
				Unrealized										Unrealized
	Cost			Gain		Loss			Fair Value			Cost		Gain		Loss			Fair Value
Cash equivalents:
Money market funds & certificates of deposit	$	(28	)	$	—	$	—		$	(28	)	$	655	$	—	$	—		$	655
Corporate debt securities & commercial paper	$	15,425		$	53	$	(6	)	$	15,472		$	6,354	$	23	$	(10	)	$	6,367
	$	15,397		$	53	$	(6	)	$	15,444		$	7,009	$	23	$	(10	)	$	7,022
Investments:
Municipal securities	$	13,539		$	30	$	(27	)	$	13,542		$	12,507	$	9	$	(24	)	$	12,492
Agency obligations	$	—		$	—	$	—		$	—		$	6,704	$	5	$	(35	)	$	6,674
Mutual Funds	$	7,111		$	27	$	(12	)	$	7,126		$	4,076						$	4,076
US & International government agencies	$	9,640		$	7	$	—		$	9,647		$	9,244	$	—	$	—		$	9,244
	$	30,290		$	64	$	(39	)	$	30,315		$	32,531	$	14	$	(59	)	$	32,486
Investments available for sale	$	45,687		$	117	$	(45	)	$	45,759		$	39,540	$	37	$	(69	)	$	39,508

The cash equivalents at June 30, 2014 was negative and reflects the investment advisor’s over subscription of other investments for several days.  The cash equivalents at December 31, 2013 represent highly liquid investments with maturities of three months or less when purchased that are held in our brokerage investment accounts.  They are classified as investments available for sale as the amounts represent investments that have matured and are anticipated to be reinvested in debt securities in the near future.

The following table summarizes maturities of our investments available for sale as of June 30, 2014 and December 31, 2013:

	June 30, 2014				December 31, 2013
	($000s)				($000s)
	Cost		Fair Value		Cost		Fair Value
Maturities:
Within 3-months	$	1,680	$	1,707	$	12,663	$	12,664
Between 3—12 months	5,247		5,256		1,623		1,610
More than 1 year	38,760		38,796		25,254		25,234
Investments available for sale	$	45,687	$	45,759	$	39,540	$	39,508

Realized gains and investment income earned on investments available for sale were $148,000 and $55,000, respectively, for the six months ended June 30, 2014 and 2013, and have been included as a component of “Other income, net” in the accompanying financial statements.

15

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)

SIX MONTHS ENDED JUNE 30, 2014 AND 2013

9. Fair Value

Fair value is defined as the price at which an asset could be exchanged or a liability transferred (an exit price) in an orderly transaction between knowledgeable, willing parties in the principal or most advantageous market for the asset or liability. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied.

Financial assets recorded at fair value in the accompanying financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The levels are directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, and are as follows:

Level 1	Inputs are unadjusted, quoted prices in active markets for identical assets at the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
	The fair valued assets we hold that are generally included in this category are money market securities and the Mesoblast shares received in the disposition of the Therapeutics business, where fair value is based on publicly quoted prices.
Level 2	Inputs are other than quoted prices included in Level 1, which are either directly or indirectly observable for the asset or liability through correlation with market data at the reporting date and for the duration of the instrument’s anticipated life.
	The fair valued assets we hold that are generally included in this category are investment grade short-term securities and our derivative instrument.
Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities and which reflect management’s best estimate of what market participants would use in pricing the asset or liability at the reporting date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
	The only asset we hold that is included in this category is the price protection derivative related to the Mesoblast shares received in the disposition of our Therapeutics business.

When quoted prices in active markets for identical assets are available, we use these quoted market prices to determine the fair value of financial assets and classify these assets as Level 1. In other cases where a quoted market price for identical assets in an active market is either not available or not observable, we obtain the fair value from a third party vendor that uses pricing models, such as matrix pricing, to determine fair value. These financial assets would then be classified as Level 2. In the event quoted market prices were not available, we would determine fair value using broker quotes or an internal analysis of each investment’s financial statements and cash flow projections. In these instances, financial assets would be classified based upon the lowest level of input that is significant to the valuation. Thus, financial assets might be classified in Level 3 even though there could be some significant inputs that may be readily available.

The price protection derivative related to the Mesoblast shares is classified in Level 3.  Its fair value was determined through use of the Black-Scholes valuation method, a standard industry methodology for valuing equity options, because the price protection is economically equivalent to a put option on the Mesoblast shares at a price of $15 million. Significant inputs to the model include the following:

Fair value of underlying Mesoblast stock: $15,000,000

Contractual life: 1.0 year

Volatility: 40%

Risk-free interest rate: 0.13%

Expected dividends: $0

16

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)

SIX MONTHS ENDED JUNE 30, 2014 AND 2013

9. Fair Value - continued

There have been no other transfers in and out of Level 3. The following table represents a rollforward of the fair value of Level 3 instruments, comprised solely of the limited price protection derivative related to the Mesoblast stock issued to us in connection with the sale of our former Therapeutics business:

	June 30, 2014
	($000s)
Balance at December 31, 2013	$	1,685
Change in Fair Value	1,475
Balance at June 30, 2014	$	3,160

Assets and liabilities measured at fair value on a recurring basis are summarized below as of June 30, 2014 and December 31, 2013:

	June 30, 2014
	($000s)
	Level I			Level II		Level III		Total
Assets
Investments available for sale
Cash & Cash Equivalents	$	(28	)	$	—	$	—	$	(28	)
Investments: Available for Sale Securities
Government Obligations	$	—		$	9,647	$	—	$	9,647
Mutual Funds	—			7,126		—		7,126
Agency Obligations	$	—		$	—	$	—	$	—
Corporate Debt Securities & Commercial Paper	—			15,472		—		15,472
Municipal Securities	$	—		$	13,542	$	—	$	13,542
Investments available for sale	$	(28	)	$	45,787	$	—	$	45,759
Derivative and securities received in business disposition
Restricted shares of Mesoblast common stock	$	12,424		$	—	$	—	$	12,424
Price protection on restricted Mesoblast shares	—			—		3,160		3,160
Derivative and securities received in business disposition	$	12,424		$	—	$	3,160	$	15,584
Total assets	$	12,396		$	45,787	$	3,160	$	61,343

17

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)

SIX MONTHS ENDED JUNE 30, 2014 AND 2013

9. Fair Value — continued

	December 31, 2013
	($000s)
	Level I		Level II		Level III		Total
Assets
Investments available for sale
Cash & Cash Equivalents	$	655	$	—	$	—	$	655
Investments: Available for Sale Securities
Government Obligations	$	—	$	9,244	$	—	$	9,244
Mutual Funds	—		4,076		—		4,076
Agency Obligations	$	—	$	6,675	$	—	$	6,675
Corporate Debt Securities & Commercial Paper	—		6,367		—		6,367
Municipal Securities	$	—	$	12,491	$	—	$	12,491
Investments available for sale	$	655	$	38,853	$	—	$	39,508
Derivative and securities received in business disposition
Restricted shares of Mesoblast common stock	$	15,401	$	—	$	—	$	15,401
Price protection on restricted Mesoblast shares	—		—		1,685		1,685
Derivative and securities received in business disposition	$	—	$	15,401	$	1,685	$	17,086
Total assets	$	655	$	54,254	$	1,685	$	56,594

10. Subsequent Events

We evaluated our June 30, 2014 financial statements for subsequent events through the date the consolidated financial statements were issued.  We are not aware of any subsequent events which would require recognition or disclosure in the consolidated financial statements. Furthermore, there have been no material changes, outside of the normal course of business, to any of the contractual obligations disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

18

ITEM 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

CAUTIONARY STATEMENTS ABOUT FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, or the Exchange Act. Statements included or incorporated herein which are not historical facts are forward looking statements. When used in this Quarterly Report, the words estimates, expects, anticipates, projects, plans, intends, believes, forecasts and variations of such words or similar expressions are intended to identify forward-looking statements, but these terms are not the exclusive means of identifying forward looking statements.

Forward looking statements reflect management’s current views with respect to future events and performance and are based on currently available information and management’s assumptions regarding future events. While management believes that its assumptions are reasonable, forward-looking statements are subject to various known and unknown risks and uncertainties and actual results may differ materially from those expressed or implied herein. In connection with the “safe harbor provisions” of the Private Securities Litigation Reform Act of 1995, we note that certain factors, among others, which could cause future results to differ materially from the forward-looking statements, expectations and assumptions expressed or implied herein are discussed in greater detail in our Annual Report on Form 10-K under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 1A “Risk Factors,” and may be discussed elsewhere herein or in other documents we file with the Securities and Exchange Commission, or SEC. Examples of forward-looking statements may include, without limitation, statements regarding any of the following: our product development efforts; the success of our product candidates in development; implementation of our corporate strategy; our financial performance; our product research and development activities and projected expenditures, including our anticipated timeline and commercialization strategy for marketed Biosurgery products (including Grafix®, Ovation®, OvationOS TM and Cartiform®); our cash needs; patents, trademarks and other proprietary rights; the safety and ability of our products perform as intended or expected; our ability to supply a sufficient amount of our marketed products or product candidates and, if or insofar as approved or otherwise commercially available, products to meet demand; our costs to comply with governmental regulations; our plans for or success of sales and marketing; our plans regarding facilities; our ability to establish and maintain reimbursement for our commercially available products; types of regulatory frameworks we expect will be applicable to our products and potential products; and results of our scientific research.

Readers are cautioned that all forward-looking statements attributable to us or persons acting on our behalf apply only as of the date of this Quarterly Report and are expressly qualified in their entirety by the cautionary statements included herein. We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances and do not intend to do so.

You should read the following management’s discussion and analysis of our financial condition and results of operations in conjunction with our audited financial statements and related notes thereto and other disclosures included as part of our Annual Report on Form 10-K for the year ended December 31, 2013, and our unaudited condensed financial statements for the three month period ended June 30, 2014 and other disclosures included in this Quarterly Report on Form 10-Q, and our Current Reports on Form 8-K during this periods and since then to date.

Our condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, and are presented in U.S. dollars.

There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this report. Some of the important factors that could cause our actual results to differ materially from the forward-looking statements we make in this report are set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 under Part I — Item 1A “Risk Factors.” There may be other factors that may cause our actual results to differ materially from the forward-looking statements.

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

Company Overview

The following is a discussion and analysis of our financial condition, results of operations, liquidity and capital resources for each of the three and six months ended June 30, 2014 and 2013 and significant factors that could affect our prospective financial condition and results of operations. You should read this discussion together with our financial statements and notes included in “Item 1. Financial Statements.”

In October 2013, we sold our Therapeutics segment for up to $100.0 million in initial and contingent consideration and we are now focused on developing and commercializing our Biosurgery business. As a result of this sale, we eliminated our Therapeutics segment from our continuing operations and we have presented the assets, liabilities and results of this segment’s operations as discontinued operations for all periods. The following discussion of our financial condition and results of operations excludes the results of our discontinued operations unless otherwise noted. See Note 2, “Discontinued Operations” in the accompanying consolidated financial statements for further discussion of these discontinued operations.

We are a leading stem cell regenerative medicine company headquartered in Columbia, Maryland and focused on developing and marketing products to treat conditions in the wound care, orthopedic and sports medicine markets. We currently market and distribute Grafix and Ovation for acute and chronic wounds, Cartiform, a viable cartilage mesh for cartilage repair, and OvationOS, a viable bone matrix for bone growth. We believe our products have significant therapeutic potential because of their ability to regulate inflammation, promote tissue regeneration and prevent pathological scar formation.

19

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

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

In October 2013, we sold our Therapeutics business to a wholly-owned subsidiary of Mesoblast Limited (ASX: MSB; USOTC: MBLYT) in a transaction that is worth up to $100 million plus royalties. The agreement with Mesoblast provides for the receipt by us of $50 million in initial consideration for closing and delivery of the assets, and for up to an additional $50 million in payments, but only upon Mesoblast achieving certain clinical and regulatory milestones. In addition, we are entitled to earn single to low double-digit cash royalties on future sales by Mesoblast of Prochymal and other products utilizing the acquired ceMSC technology. Mesoblast has assumed all future development costs and efforts.  As of December 31, 2013, of the $50 million in initial consideration, we had received $35 million, comprised of $20 million in cash and $15 million of Mesoblast stock, which is restricted from resale until December 2014. We received the remainder of the initial consideration, in the amount of $15 million, in cash, on April 9, 2014. We have entered into a separate transition services agreement with Mesoblast to assure a seamless transition, and once we fulfill our duties under this agreement, will be able to focus our full attention on our Biosurgery business.  We extended the term of this agreement to October 2014, but still expect to complete all our responsibilities under it during fiscal 2014.

We are a fully integrated company, having developed capabilities in research, development, manufacturing, marketing and distribution of stem cell products.

Financial Operations Overview

Revenue

We produce human tissue-based products in our Columbia, Maryland facility and distribute these products through a network of independent distributors as well as through the efforts of employee sales personnel. We presently produce and distribute Grafix and Ovation for acute and chronic wounds, Cartiform, a viable cartilage mesh for cartilage repair, and OvationOS for bone growth. All of these products are cryo-preserved and stored in special freezers at -80 degrees Celsius. Customers have the product shipped to them on dry ice. Legal title usually passes to the customer when the product leaves our shipping dock. We do have consignment inventory at certain hospital sites and in those situations, title instead passes to the customer when the product is used in a surgical procedure. Due to the nature of the products and the manufacturing process, we generally do not allow sales returns.

During the third quarter of fiscal 2010, we launched Grafix for limited commercial distribution, as the first product in our then newly established Biosurgery business. We began distribution of a second Biosurgery product, Ovation, in early fiscal 2011.  These products follow our first generation Biosurgery product, Osteocel, which we sold to Nuvasive, Inc. in 2008 for approximately $80 million in aggregate consideration.  We have continued to increase our distribution volume for Grafix and our other current Biosurgery products throughout fiscal 2011, 2012 and 2013, and continuing during the second quarter of fiscal 2014, both through in-house personnel as well as through our expanding distributor network. The increase in product revenue and gross profit since commercial launch is due to volume increases. We anticipate continuing to increase our organizational focus on the development and commercialization of Biosurgery products in the foreseeable future.

Research and Development Costs

Our research and development costs consist of expenses incurred in identifying, developing and testing biologic tissue based products. These expenses consist primarily of salaries and related expenses for personnel, fees paid to professional service providers for independent monitoring and analysis of our clinical trials, costs of contract research and manufacturing, costs of facilities, and the costs of manufacturing clinical trial materials and quality control supplies. Our historic research and development costs included these and other costs specific to our efforts focused on our biologic drug candidates, including costs of manufacture of clinical batches of our biologic drug candidates.

Consistent with our historic focus on the development of biologic drug candidates with potential uses in multiple indications, many of our historic costs are not attributable to a specifically identified product. We use our employee and infrastructure resources across several projects. Accordingly, we do not account for internal research and development costs on a project-by-project basis. From inception in December 1992 through June 30, 2014, we incurred aggregate research and development costs of approximately $438 million.

Biosurgery research and development expenses for the comparable periods were $1.1 million during each of the second quarters of fiscal 2014 and 2013, which includes costs incurred for a study, Protocol 302, which began during the second quarter of Fiscal 2012 and was designed to allow for the collection of data necessary to obtain the permanent HCPCS Q-codes for Grafix, which are required for Medicare and Medicaid reimbursement when treatment is performed in the outpatient setting.

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

·the number of patients who participate in the trials;

·the number of sites included in the trials;

·the length of time required to enroll trial participants;

·the duration of patient treatment and follow-up;

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

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

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

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

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of the costs associated with our selling and marketing efforts and well as our general management, including salaries, sales commissions, allocations of facilities and related costs, and professional fees such as legal and accounting expenses. Generally, we have experienced a decrease in general and administrative costs as the result of our continued cost cutting efforts and the refinement of many of our general business processes, as well as a reduction in share-based compensation expense. During the first half of fiscal 2014, we added 83 employees, increasing our total internal sales force and customer service representatives to approximately 75 employees. We expect future expense increases to continue as a result of hiring additional operational, financial, accounting, facilities engineering and information systems personnel, as we continue to increase our distribution efforts for of our Biosurgery products. We did not experience any significant reductions in our general and administrative expenses as the result of the sale of our Therapeutics business.

Other Income (Expense), Net

Other income consists of interest earned on our cash and investments available for sale, realized gains and losses incurred on the sale of these investments, and the unrealized gains and losses incurred on our trading securities (which we account for using the “fair value” method), net of interest expense. Interest expense consists of interest incurred on capital leases. We do not expect to incur material interest expense in the future as we do not have a material amount of equipment under capital lease or any outstanding debt.

Critical Accounting Policies

There have been no material changes in our critical accounting policies, estimates, and judgments during the six months ended June 30, 2014 compared to the disclosures in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, other than as disclosed herein.

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Results of Operations

Comparison of Three Months Ended June 30, 2014 and 2013

Product Revenues & Gross Profit

During the second quarter of fiscal 2014, our revenue from product distribution more than doubled to $13.3 million, as we continued to focus on the commercialization of our Biosurgery products. The increase in revenue was achieved through the expansion of our in-house sales and marketing team, as well as increases from our product distributors. We experienced growth in sales of both Grafix and Ovation, and during the second quarter of fiscal 2014 we realized product revenue from the limited distribution of OvationOS, a viable bone matrix for bone growth, and Cartiform, a viable cartilage mesh for cartilage repair. Although revenue from the distribution of these two new products is still account for only a small percentage of our total product revenue, we believe OvationOS and Cartiform will contribute to our future growth and are complementary products to both Grafix and Ovation, simplifying the sales efforts.  Our gross profit increased in the second quarter of fiscal 2014 to 78% compared to 72% in the comparable period of the prior year, primarily as the result of operational efficiencies as we more heavily utilize our production facilities. During the second quarter of fiscal 2014, we started to operate our manufacturing facilities at our Columbia, Maryland location using two shifts.  We have manufacturing capacity to facilitate further growth without substantial increases in our clean room and manufacturing facilities.

Research and Development Expenses

Research and development expenses in the second quarter of fiscal 2014 were $1,055,000 compared to $1,132,000 in the same period of fiscal 2013. The reduction in R&D expenses reflect the completion of our Protocol 302 study evaluating the efficacy of Grafix for the treatment of diabetic foot ulcers compared to the standard of care.  We expect to start further studies of Grafix in additional indications during fiscal 2014, and our R&D costs are expected to increase over the second quarter experience.

Selling, General and Administrative Expenses

Selling, general and administrative expenses rose to $9.3 million during the second quarter of fiscal 2014 compared to $4.2 million in the same period of fiscal 2013.  The significant majority of these cost increases were incurred in sales and marketing efforts to increase our product distribution and to build up our infrastructure in the areas of reimbursement for public and private health care providers.  During the second quarter of fiscal 2014, we continued to increase the size of our in-house direct sales force for Grafix, and invested in training and more extensive product support capabilities.  We also completed our team of reimbursement specialists. Selling, general and administrative costs were 70.3% of product revenue in the second quarter of fiscal 2014 compared to 78.6% during the same period in fiscal 2013.  We will continue to heavily invest in our sales, marketing and reimbursement capabilities throughout the remainder of fiscal 2014 and also expect to incur additional costs to augment our human resources, finance and information technology capabilities to support our expanding sales force.

Other Income (Expense), Net

Other income, net in the second quarter of fiscal 2014 consisted of the net realized investment income earned on our investments available for sale of $25,000, together with the unrealized loss of approximately $2.5 million on the market value decrease of the Mesoblast stock we received in connection with the sale of our Therapeutics business, as well as the $1.2 million increase in the fair value of the derivative from the limited price protection afforded us on the Mesoblast stock.  We carry the Mesoblast stock and the related derivative as Trading Securities.  The derivative is valued at approximately $3.2 million at the end of the second quarter of fiscal 2014.  This amount will be fully amortized into Other income (expense), net by the time the restriction on our ability to sell the Mesoblast stock lapses in December 2014. The fair market value of the Mesoblast stock at June 30, 2014 was $12.4 million. Other Income (Expense), Net in the same period of fiscal 2013 consisted solely of the net investment gains on our investments available for sale.

Income Taxes

Due to taxable income expected from discontinued operations for income tax accounting purposes and a decrease in the forecasted net loss from continuing operations, we recognized an income tax expense for both continuing and discontinued operations in the three months ended June 30, 2014.  In fiscal 2014, we will utilize our remaining $3.5 million of net operating losses and begin to use part of our $74 million of tax credits to offset the taxable income tax from discontinued operations.  We will maintain our full valuation allowance until operations from our Biosurgery business (continuing operations) provides evidence of sufficient future earnings.  For the three months ending June 30, 2013, there was a tax expense recognized to reverse the tax benefit recorded in three months ended March 31, 2013. The 2013 tax expense related to discontinued operations will be reflected in the period in which the gain from the discontinued operations was recognized.

Comparison of Six Months Ended June 30, 2014 and 2013

Product Revenues & Gross Profit

During the first six months of fiscal 2014, our revenue from product distribution more than doubled to $23.3 million, as we continued to focus on the commercialization of our Biosurgery products. The increase in revenue was achieved through the expansion of our in-house sales and marketing team, as well as increases from our product distributors. We experienced growth in sales of both Grafix and Ovation, and during the second quarter of fiscal 2014 we realized product revenue from the limited distribution of OvationOS, a viable bone matrix for bone growth, and Cartiform, a viable cartilage mesh for cartilage repair. Our gross profit increased in the first six months of fiscal 2014 to 78% compared to 72% in the comparable period of the prior year, primarily as the result of operational efficiencies as we more heavily utilize our production facilities. During the second quarter of fiscal 2014, we started to operate our production facilities at our Columbia, Maryland location using two shifts.  We have production capacity to facilitate further growth without substantial increases in our clean room and production facilities.

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Research and Development Expenses

Research and development expenses in the first six months of fiscal 2014 were $1.7 million compared to $2.1 million in the same period of fiscal 2013. The reduction in R&D expenses reflect the completion of our Protocol 302 study evaluating the efficacy of Grafix for the treatment of diabetic foot ulcers compared to the standard of care.  We expect to start further studies of Grafix in additional indications during the second half of fiscal 2014, and our R&D costs are expected to increase over the second quarter experience.

Selling, General and Administrative Expenses

Selling, general and administrative expenses rose to $16.6 million during the first six months of fiscal 2014 compared to $6.6 million in the same period of fiscal 2013.  The significant majority of these cost increases were incurred in sales and marketing efforts to increase our product distribution and to build up our infrastructure in the areas of reimbursement for public and private health care providers.  During the first six months of fiscal 2014, we continued to increase the size of our in-house direct sales force for Grafix, and invested in training and more extensive product support capabilities.  We also added personnel to our team of reimbursement specialists. Selling, general and administrative costs were 71.0% of product revenue in the first half of fiscal 2014 compared to 70.2% during the same period in fiscal 2013.  We will continue to heavily invest in our sales, marketing and reimbursement capabilities throughout the remainder of fiscal 2014 and also expect to incur additional costs to augment our human resources, finance and information technology capabilities to support our expanding sales force.

Other Income (Expense), Net

Other income, net in the first half of fiscal 2014 consisted of the net realized investment income earned on our investments available for sale of $79,000, together with the unrealized loss of approximately $3.0 million on the market value decrease of the Mesoblast stock we received in connection with the sale of our Therapeutics business, as well as the $1.2 million increase in the fair value of the derivative from the limited price protection afforded us on the Mesoblast stock.  We carry the Mesoblast stock and the related derivative as Trading Securities.  Other Income (Expense), Net in the same period of fiscal 2013 consisted solely of the net investment gains on our investments available for sale.

Income Taxes

Due to taxable income expected from both continuing and discontinued operations for income tax accounting purposes, we recognized an income tax expense for discontinued operations for the six months ended June 30, 2014.  There was no income tax expense recognized for continuing operations since there are sufficient tax credits available to offset expected taxable income for the year.  In fiscal 2014, we will utilize our remaining $3.5 million of net operating losses and begin to use part of our $74 million of tax credits to offset the taxable income tax from discontinued operations.  We will maintain our full valuation allowance until operations from our Biosurgery business (continuing operations) provides evidence of sufficient future earnings.  There was no tax expense recognized for the six months ending June 30, 2013 due to taxable losses from both continuing discontinued operations for which no benefit was provided.

Liquidity and Capital Resources

Liquidity

At June 30, 2014, we had $2.7 million in cash and $45.8 million in investments available for sale. Trading securities include $15 million of Mesoblast stock which we will be able to sell starting in December 2014. At June 30, 2014, the fair market value of the Mesoblast stock was $12.4 million and we recognized a $2.6 million decrease in the market value as a component of Other income (expense) net. We have not had any outstanding debt at any time since fiscal 2008.

Cash Flow

Net cash used in operating activities of continuing operations during the first half of fiscal 2014 was $8.7 million, and primarily reflects our net loss from continuing operations of $2.0 million, net increases in our trade receivables and inventory, partially offset by non cash charges.

Net cash used in operating activities of continuing operations during the first half of fiscal 2013 was $2.9 million, and reflects our net loss of $2.1 million, and net increases in our trade receivables and inventory, partially offset by non cash charges.

Net cash provided by investing activities was $8.6 million and $6.3 million, respectively, during first half of fiscal 2014 and 2013, and in each year primarily reflects proceeds from the sales of our investments to fund our operations.

Net cash provided by financing activities was $1.5 million and $559,000, respectively, during first half of fiscal 2014 and 2013. The cash provided by financing activities is primarily the net proceeds from the exercise of stock options by our employees.

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Capital Resources.

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

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

·the scope and results of our clinical trials;

·the need for (whether or not anticipated) and the timing of, and the costs involved in, obtaining regulatory approvals for our Biosurgery products, which could be costly and time consuming; the costs of maintaining, expanding and protecting our intellectual property portfolio, including possible litigation costs and liabilities; and

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

We have not had any outstanding debt at any time since fiscal 2008.

Off-Balance Sheet Arrangements.

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

ITEM 3.    Quantitative and Qualitative Disclosures about Market Risk.

Interest Rate Risk

Due to the short duration of our investment portfolio and the high quality of our investments, an immediate 10% change in interest rates would not have a material effect on the value of our portfolio. Therefore, we would not expect our operating results or cash flows to be affected to any material degree by the effect of a sudden change in market interest rates on our securities portfolio.

We believe that the interest rate risk related to our accounts receivable is not significant. We manage the risk associated with these accounts through periodic reviews of the carrying value for non-collectability and establishment of appropriate allowances in connection with our internal controls and policies.

Derivative Instruments

Generally, we do not enter into hedging or derivative instrument arrangements. In connection with the sale of our Therapeutics business, we did receive $15 million of Mesoblast Limited ordinary shares which are restricted from sale for a period of twelve months.  Mesoblast has provided us with limited price protection in the event that the value of the shares when the restrictive period expires is lower than the price when the shares were issued.  In the event the price is lower, Mesoblast is obligated to pay us the difference, 50% of which will be in cash and the balance in either cash or additional Mesoblast shares, at the sole discretion of Mesoblast.  In the event Mesoblast issues additional shares in this regard, the new shares would be subject to a new twelve month restriction period, but would not have price protection. We account for this price protection as a derivative instrument.

Equity Price Risk and Foreign Currency Exchange Rate Risk

We conduct clinical trial activities in areas that operate in a functional currency other than the United States dollar (USD). As a result, when the USD rises and falls against the functional currencies of these other nations, our costs will either increase or decrease by the relative change in the exchange rate. Foreign currency gains and losses were not material during the second quarter of fiscal 2014 or 2013, and at the present time, we have elected not to hedge our exposure to foreign currency fluctuations.

We are also subject to equity price risk and foreign currency exchange rate risk associated with our prior and any future receipt of shares of Mesoblast ordinary shares as payment under the Purchase Agreement with Mesoblast for the sale of our Therapeutics segment.  We are required to hold that stock for one year from the date of receipt, but currently intend to dispose of the Mesoblast stock as soon as we are able to do so. In the meantime we will be subject to equity price risk associated with the ownership of the Mesoblast ordinary shares. The Mesoblast stock is traded on the Australian Securities Exchange and its share value is denominated there in Australian Dollars.  Hence there also exists an associated foreign currency exchange rate risk.  The equity price risk is mitigated in part by limited price protection for the one year required holding period. To the extent the value of the shares decreases during the holding period, Mesoblast has agreed to pay us for the decrease in value.  This payment is to be made at least one half in cash and, at the option of Mesoblast, up to one half in additional shares of Mesoblast stock. Any additional Mesoblast stock issued to us will also have to be held for one year, during which period there will be no further price protection, and therefore the equity price risk (and the foreign currency risk) will persist. There is no corresponding mitigation of the foreign currency exchange rate risk, and a devaluation of the Australian Dollar will directly impact the value of the Mesoblast shares to us.

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Item 4.          Controls and Procedures.

Evaluation of Disclosure Controls and Procedures. An evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended), as of the end of the period covered by this Quarterly Report on Form 10-Q was made under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer.  A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met.  Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that due to the material weakness in our internal control over financial reporting described below, our disclosure controls and procedures were not effective as of June 30, 2014. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

As further described in our Annual Report on Form 10-K for our fiscal year ended December 31, 2013, as filed with the Securities and Exchange Commission on March 31, 2014, our management determined that our processes, procedures and controls related to financial reporting were not effective to ensure effective oversight of the work performed by, and the accuracy of financial information or professional conclusions provided by, third-party tax advisors, regarding components of the income tax provision calculation (specifically the allocation between continuing and discontinuing operations), given a one-time significant transaction of disposing of a business segment. This occurred notwithstanding that we had retained a nationally known outside public accounting firm, which we understand to be PCAOB certified, to advise us on, and to analyze and to perform the tax accounting functions related to, these matters. This material weakness was identified in connection with our assessment of the effectiveness of internal control over financial reporting as of December 31, 2013, and as of June 30, 2014 had not determined to have been remediated..

Notwithstanding the identified material weakness described above, management believes that the financial statements and other financial information included in this report present fairly in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with accounting principles generally accepted in the United States.

With the oversight of our management and the audit committee of our board of directors, we have since taken steps and plan to take additional measures to remediate the underlying causes of the material weakness described above. Because the identified material weakness has not yet been remediated, however, this control deficiency could result in a material misstatement of the financial statements that would not be prevented or detected. See the risk factor in our 2013 Form 10-K contained in Part I, Item 1A under the heading “Risk Factors—We have identified a material weakness in our internal control over financial reporting and we may be unable to develop, implement and maintain appropriate controls in future periods. If the material weakness is not remediated, then it could result in a material misstatement to the financial statements.”

Changes in Internal Control over Financial Reporting. There have not been any changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1.          Legal Proceedings .

From time to time, we receive threats or may be subject to routine litigation matters related to our business.  However, we are not currently a party to any material pending legal proceedings.

Item 1A. Risk Factors .

There have not been any material changes in the risk factors previously disclosed under the heading “Risk Factors” in Part I — Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 as filed with the Securities and Exchange Commission on March 31, 2014.

Item 2.          Unregistered Sales of Equity Securities and Use of Proceeds .

None.

Item 3.          Defaults Upon Senior Securities .

None.

Item 4.          Mine Safety Disclosures.

None.

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Item 5.          Other Information .

None.

Item 6.          Exhibits.

Exhibit  Number	Description of Exhibit
31.1.1*	Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended (Section 302 of the Sarbanes-Oxley Act of 2002).
31.2.1*	Certification of Principal Financial Officer pursuant o Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended (Section 302 of the Sarbanes-Oxley Act of 2002).
32.1*	Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, formatted in Extensible Business Reporting Language (XBRL), include: (i) the Condensed Statements of Income, (ii) the Condensed Balance Sheets, (iii) the Condensed Statements of Cash Flows, and (iv) related notes (furnished herewith).

* filed herewith.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Osiris Therapeutics, Inc.
Date: August 11, 2014	/s/ PHILIP R. JACOBY, JR.
	Philip R. Jacoby, Jr.
	Chief Financial Officer (Principal Financial Officer)

26

EX-31.1.1

Exhibit 31.1.1

Certification of Principal Executive Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Lode Debrabandere, certify that:

1.                          I have reviewed this Quarterly Report on Form 10-Q for the period ended June 30, 2014 of Osiris Therapeutics, Inc.;

2.                          Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.                          Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.                          The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)                                 Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)                                 Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)                                 Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)                                 Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.                          The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)                                 All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)                                 Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 11, 2014
	/s/ LODE DEBRABANDERE
	Lode Debrabandere, Ph.D.
	President & Chief Executive Officer

EX-31.2.1

Exhibit 31.2.1

Certification of Principal Financial Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Philip R. Jacoby, Jr., certify that:

1.                       I have reviewed this Quarterly Report on Form 10-Q for the period ended June 30, 2014 of Osiris Therapeutics, Inc.;

2.                       Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.                       Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.                       The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)                                       Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)                                       Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)                                       Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)                                       Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.                      The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)                                       All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)                                       Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 11, 2014
	/s/ PHILIP R. JACOBY, JR.
	Philip R. Jacoby, Jr.
	Chief Financial Officer

EX-32.1

Exhibit 32.1

Certification

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of Osiris Therapeutics, Inc. (the “Company”), does hereby certify, to the best of each officer’s knowledge, that:

The Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 (the “Form 10-Q”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 11, 2014	/s/ LODE DEBRABANDERE
	Lode Debrabandere, Ph.D.
	President & Chief Executive Officer
Date: August 11, 2014	/s/ PHILIP R. JACOBY, JR.
	Philip R. Jacoby, Jr.
	Chief Financial Officer

This certification “accompanies” the Form 10-Q to which it relates, is not deemed filed with the United States Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.

XML

Investments Available for Sale (Details 2) (USD $)	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Dec. 31, 2013
Cost
Maturities Within 3-months	$ 1,680,000		$ 12,663,000
Maturities Between 3-12 months	5,247,000		1,623,000
More than 1 year	38,760,000		25,254,000
Cost of investments available for sale	45,687,000		39,540,000
Fair Value
Maturities Within 3-months	1,707,000		12,664,000
Maturities Between 3-12 months	5,256,000		1,610,000
More than 1 year	38,796,000		25,234,000
Fair value of investments available for sale	45,759,000		39,508,000
Realized gains and investment income earned on investments available for sale	$ 148,000	$ 55,000

XML

Segment Reporting (Details)	0 Months Ended	6 Months Ended
	Oct. 09, 2013 item	Jun. 30, 2014 item
Segment Reporting
Number of operating segments	2	1

XML

Fair Value (Tables)

6 Months Ended

Jun. 30, 2014

Fair Value

Schedule of significant inputs used to measure fair value using Black-Scholes valuation method

Fair value of underlying Mesoblast stock: $15,000,000

Contractual life: 1.0 year

Volatility: 40%

Risk-free interest rate: 0.13%

Expected dividends: $0

Schedule of rollforward of the fair value of Level 3 instruments, comprised solely of the limited price protection derivative related to the Mesoblast stock issued to entity in connection with the sale of entity's former Therapeutics business

	June 30, 2014
	($000s)
Balance at December 31, 2013	$	1,685
Change in Fair Value	1,475
Balance at June 30, 2014	$	3,160

Schedule of assets and liabilities measured at fair value on a recurring basis

	June 30, 2014
	($000s)
	Level I			Level II		Level III		Total
Assets
Investments available for sale
Cash & Cash Equivalents	$	(28	)	$	—	$	—	$	(28	)
Investments: Available for Sale Securities
Government Obligations	$	—		$	9,647	$	—	$	9,647
Mutual Funds	—			7,126		—		7,126
Agency Obligations	$	—		$	—	$	—	$	—
Corporate Debt Securities & Commercial Paper	—			15,472		—		15,472
Municipal Securities	$	—		$	13,542	$	—	$	13,542
Investments available for sale	$	(28	)	$	45,787	$	—	$	45,759
Derivative and securities received in business disposition
Restricted shares of Mesoblast common stock	$	12,424		$	—	$	—	$	12,424
Price protection on restricted Mesoblast shares	—			—		3,160		3,160
Derivative and securities received in business disposition	$	12,424		$	—	$	3,160	$	15,584
Total assets	$	12,396		$	45,787	$	3,160	$	61,343

	December 31, 2013
	($000s)
	Level I		Level II		Level III		Total
Assets
Investments available for sale
Cash & Cash Equivalents	$	655	$	—	$	—	$	655
Investments: Available for Sale Securities
Government Obligations	$	—	$	9,244	$	—	$	9,244
Mutual Funds	—		4,076		—		4,076
Agency Obligations	$	—	$	6,675	$	—	$	6,675
Corporate Debt Securities & Commercial Paper	—		6,367		—		6,367
Municipal Securities	$	—	$	12,491	$	—	$	12,491
Investments available for sale	$	655	$	38,853	$	—	$	39,508
Derivative and securities received in business disposition
Restricted shares of Mesoblast common stock	$	15,401	$	—	$	—	$	15,401
Price protection on restricted Mesoblast shares	—		—		1,685		1,685
Derivative and securities received in business disposition	$	—	$	15,401	$	1,685	$	17,086
Total assets	$	655	$	54,254	$	1,685	$	56,594

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Income Taxes (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Income Taxes
Income tax expense (benefit)	$ (130)	$ (358)	$ 0	$ 0

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Description of Business and Significant Accounting Policies

6 Months Ended

Jun. 30, 2014

Description of Business and Significant Accounting Policies

Description of Business and Significant Accounting Policies

1.  Description of Business and Significant Accounting Policies

Description of Business

Osiris Therapeutics, Inc. (“we,” “us,” “our,” or the “Company”) is a Maryland corporation headquartered in Columbia, Maryland. We began operations on December 23, 1992 and were a Delaware corporation until, with approval of our stockholders, we reincorporated as a Maryland corporation on May 31, 2010. We are a leading stem cell regenerative medicine company focused on developing and marketing products in the wound, orthopedic, and sports medicine markets.

From 2010 to 2013, we operated our business in two segments, Biosurgery and Therapeutics. We now operate only our Biosurgery business, as a result of the sale of our Therapeutics segment assets in the fourth quarter of 2013, as discussed further below. Our Biosurgery business focuses on products for wound care, cartilage repair, and orthopedics, to harness the ability of cells and novel constructs to promote the body’s natural healing. Until it was sold, our Therapeutics business focused on developing biologic stem cell drug candidates from a readily available and non-controversial source—adult bone marrow.

Our Biosurgery business has continued to grow since its inception, and we have increased our organizational focus on the development and commercialization of products in this segment. Consistent with this organizational focus, as discussed further in Note 2— Discontinued Operations, on October 10, 2013, we entered into a Purchase Agreement to sell our Therapeutics segment, including all of our culture expanded mesenchymal stem cell business, including Prochymal and other related assets. We eliminated the Therapeutics segment from our continuing operations as a result of the disposal transaction, and have presented the assets, liabilities, and results of the segment’s operations as a discontinued operation for all periods presented. Our continuing operations now represent the portion of our business previously referred to as our Biosurgery segment.

Unaudited Interim Financial Statements

Except for the Balance Sheet as of December 31, 2013, which was derived from audited financial statements, the accompanying condensed financial statements are unaudited.  The accompanying condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, these statements include all adjustments (consisting of normal recurring adjustments) considered necessary to present a fair statement of our results of operations, financial position and cash flows. Operating results for any interim period are not necessarily indicative of the results that may be expected for the full year. This Quarterly Report on Form 10-Q should be read in conjunction with our financial statements and footnotes included in our Annual Report on Form 10-K (“2013 10-K”) for the fiscal year ended December 31, 2013.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Due to the inherent uncertainty involved in making those assumptions, actual results could differ from those estimates. We believe that the most significant estimates that affect our financial statements are those that relate to deferred tax assets, inventory valuation, share-based compensation and the value of the derivative obtained in connection with the sale of our former Therapeutics business.

Reclassifications

We have reclassified certain prior-year amounts for comparative purposes. These reclassifications did not affect our results of operations or financial positions for the years presented.

Cash and Cash Equivalents

Amounts listed as cash on our balance sheets are maintained in depository accounts at a commercial bank. Cash and cash equivalents, which include highly liquid investments with maturities of three months or less when purchased, held in our brokerage investment accounts are classified as investments available for sale, as the amounts represent investments that have matured and are anticipated to be reinvested in debt securities in the near future, and are disclosed at fair value, which approximates cost.

Investments Available for Sale

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

Investments available for sale are evaluated periodically to determine whether a decline in their value is “other than temporary.” The term “other than temporary” is not intended to indicate a permanent decline in value. Rather, it means that the prospects for near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the security. We review criteria such as the magnitude and duration of the decline, as well as the reasons for the decline, to predict whether the loss in value is other than temporary. If a decline in value is determined to be other than temporary, the carrying value of the security is reduced and a corresponding charge to earnings is recognized.

Trading Securities - Derivative and Securities Received in Business Disposition

As discussed in Note 2 — Discontinued Operations, we disposed of our Therapeutics segment in October 2013.  A portion of the consideration for the sale of that business was stock of Mesoblast Limited (“Mesoblast”), the parent of the purchaser.  We are required to hold that stock for one year from the date of receipt.  We currently intend to dispose of the Mesoblast stock as soon as we are able to do so in December 2014.  As such, we have reflected the investment as a current asset in Trading Securities.  Mesoblast is a public company and its stock is traded on the Australian stock exchange.

The Mesoblast stock is subject to limited price protection for the one year required holding period. To the extent the value of those shares decreases during the holding period, Mesoblast is required to pay us for the decrease in value.  This payment is to be made at least one half in cash and at the option of Mesoblast, up to one half in additional shares of Mesoblast stock. Any additional Mesoblast stock will also have to be held for one year during which period there is no further price protection. The price protection is accounted for as a derivative under ASC 815, Derivatives and Hedging, and, as such is recorded on the balance sheet at fair value, with changes in value recognized in Other income (expense), net. We have elected to measure the Mesoblast stock at fair value with changes in fair value reflected in Other income (expense), net, as permitted under ASC 825-10, Financial Instruments — Fair Value Option.

Our only derivative instrument is the price protection guarantee regarding the payment received in restricted shares of Mesoblast stock.  We do not hold derivative financial instruments for trading purposes.

Restricted Cash

We periodically are required under the terms of various agreements to provide letters of credit which are collateralized by cash deposits. The restricted cash relates to a letter of credit that we caused to be issued in lieu of a security deposit under the operating lease for our Columbia, Maryland facility.

Trade Accounts Receivable

Trade accounts receivable are reported at their net realizable value. We charge off uncollectible receivables when the likelihood of collection is remote. We set credit terms with individual customers, and consider receivables outstanding longer than the time specified in the respective customer’s contract, typically 45-days, to be past due. As of June 30, 2014 and December 31, 2013, accounts receivable in the accompanying balance sheets are reported net of a $128,000 and $78,000 allowance for doubtful accounts, respectively. We believe the reported amounts are fully collectible. Trade accounts receivable balances are not collateralized. We incurred $50,000 of bad debt expense in the first half of fiscal 2014. We did not incur any bad debts expense in the first half of fiscal 2013.

Other Receivables

Other receivables include reimbursements due us from Mesoblast for goods and services provided to them in connection with the Transition Services Agreement entered into as part of the sale transaction.  The Transition Services Agreement has been extended so that we will provide some services to Mesoblast through October 10, 2014, and will continue to be reimbursed for the costs incurred. Other receivables also include accrued interest from the company’s investments and federal income tax refunds expected.

Inventory

We began carrying inventory of our Biosurgery products on our balance sheet following commercial launch of such products. Inventory consists of raw materials, biologic products in process, and products available for distribution. We determine our inventory values using the first-in, first-out method. Inventory is valued at the lower of cost or market, and excludes units that we anticipate distributing for clinical evaluation. Materials and supplies purchased for product development and product improvement activities are expensed as incurred.

Property and Equipment

Property and equipment, including improvements that extend useful lives, are valued at cost, while maintenance and repairs are charged to operations as incurred. Depreciation is calculated using the straight-line method based on estimated useful lives ranging from three to seven years for furniture, equipment and internal use software. Leasehold improvements and assets under capital leases are amortized over the shorter of the estimated useful life of the asset or the term of the lease.

Valuation of Long-lived Assets

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

Biosurgery Revenue Recognition

We recognize revenue from product distribution when title passes to the customer.  Title usually passes when the product is shipped to the customer and leaves our loading dock.  In some situations, we store consigned inventory on site in freezers at hospital or clinic facilities and title  passes to the customer when the product is used in a surgical procedure.  In these instances we recognize the revenue upon notification of the completed surgical procedure.  We verify the condition and status of all consigned inventory on at least a quarterly basis.   Due to the nature of our products and the need to ensure they are maintained at the proper frozen temperature, we generally do not allow product returns.

Therapeutics Revenue Recognition

In our former Therapeutics business, we evaluated revenues from agreements that have multiple elements to determine whether the components of the arrangement represent separate units of accounting. To recognize a delivered item in a multiple element arrangement, the delivered items must have value on a standalone basis and the delivery or performance must be probable and within our control for any delivered items that have a right of return. The determination of whether multiple elements of a collaboration agreement meet the criteria for separate units of accounting requires us to exercise judgment. We account for the activities of our former Therapeutics business as discontinued operations.

Revenues from research licenses associated with our former Therapeutics business were recognized as earned upon either the incurring of reimbursable expenses directly related to the particular research plan or the completion of certain development milestones as defined within the terms of the agreement. Payments received in advance of research performance were designated as deferred revenue. Non-refundable upfront license fees and certain other related fees associated with our former Therapeutics business were recognized on a straight-line basis over the development periods of the contract deliverables. Fees associated with substantive at risk performance based milestones are recognized as revenue upon their completion, as defined in the respective agreements. Incidental assignment of technology rights were recognized as revenue when and if it was earned and received.

Research and Development Costs

We expense internal and external research and development (“R&D”) costs, including costs of funded R&D arrangements and the manufacture of clinical batches of Biosurgery products used in clinical trials, in the period incurred.

Income Taxes

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

We recognize in our financial statements the impact of a tax position, if that position is more likely than not to be sustained upon an examination, based on the technical merits of the position. Interest and penalties related to income tax matters are recorded as income tax expense. At June 30, 2014 and December 31, 2013 we had no accruals for interest or penalties related to income tax matters.

Income per Common Share

Basic income per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted income per common share adjusts basic income per share for the potentially dilutive effects of common share equivalents, using the treasury stock method, and includes the incremental effect of shares that would be issued upon the assumed exercise of stock options and warrants.

Diluted loss per common share for the three and six months ended June 30, 2014 excludes all 1,536,945 of our outstanding options as of that date, as their impact on our net loss is anti-dilutive.

Diluted loss per common share for the three and six months ended June 30, 2013 excludes the 1,000,000 shares issuable upon the exercise of an outstanding warrant, and all 2,042,914 of our outstanding options as of that date, as their impact on our net loss is anti-dilutive.

Share-Based Compensation

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

We recognize all share-based payments to employees and non-employee directors in our financial statements based on their grant date fair values, calculated using the Black-Scholes option pricing model. Compensation expense related to share-based awards is recognized on a straight-line basis for each vesting tranche based on the value of share awards that are expected to vest on the grant date, which is revised if actual forfeitures differ materially from original expectations.

Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income and all changes in equity from non-stockholder sources, which consist of changes in unrealized gains and losses on investments.

Concentration of Risk

We maintain cash and short-term investment balances in accounts that exceed federally insured limits, although we have not experienced any losses on such accounts. We also invest excess cash in investment grade securities, generally with maturities of one year or less.

We have historically provided credit in the normal course of business to contract counterparties and to the distributors of our product. Trade accounts receivable in the accompanying balance sheets consist primarily of amounts due from end user customers and distributors of our Biosurgery products within the United States. During the first half of fiscal 2014 and 2013, revenues from one of the distributors of our Biosurgery products, Stability Biologics, comprised approximately 11% and 43%, respectively, of our total Biosurgery product revenues. As of June 30, 2014 and December 31, 2013, receivables from this distributor comprised 11% and 57%, respectively, of our trade receivables. We expect all of our reported receivables to be fully collected. As discussed under “Trade Accounts Receivable,” we have incurred $50,000 bad debt expense for the three months ended June 30, 2014. We did not incur any bad debts expense in the first half of fiscal 2013.

Recently Adopted Accounting Guidance at June 30, 2014

In July 2013, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) related to the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists.  The ASU requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as either a reduction to a deferred tax asset or separately as a liability depending on the existence, availability and/or use of an operating loss carryforward, a similar tax loss, or a tax credit carryforward. This ASU was adopted at January 1, 2014. This ASU did not have an impact on our consolidated financial statements as we currently do not have any unrecognized tax benefits in the same jurisdictions in which we have tax loss or credit carryovers.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services.  The new standard will replace most of the existing revenue recognition standards in U.S. GAAP when it becomes effective on January 1, 2017.  Early adoption is not permitted.  The new standard can be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of the change recognized at the date of the initial application.  We are currently assessing the impact the adoption of ASU 2014-09 will have on our condensed consolidated financial position, results of operations and cash flows.

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Description of Business and Significant Accounting Policies (Details 4) (USD $)	6 Months Ended	12 Months Ended
	Jun. 30, 2014	Dec. 31, 2013
Valuation of Long-lived Assets
Impairment losses	$ 0	$ 0
Income Taxes
Accruals for interest or penalties related to income tax matters	$ 0	$ 0
Minimum
Property and Equipment
Estimated useful lives	3 years
Maximum
Property and Equipment
Estimated useful lives	7 years

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Description of Business and Significant Accounting Policies (Details 3) (USD $)	3 Months Ended	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2014	Jun. 30, 2013	Dec. 31, 2013
Trade Accounts Receivable
Typical trade accounts receivable due period		45 days
Allowance for doubtful accounts related to accounts receivable	$ 128,000	$ 128,000		$ 78,000
Trade Accounts Receivable
Provision for bad debts	$ 50,000	$ 50,000	$ (25,000)

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Description of Business and Significant Accounting Policies (Details 5)	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Warrant
Income per Common Share
Anti-dilutive securities not included in diluted income (loss) per common share		1,000,000		1,000,000
Stock options
Income per Common Share
Anti-dilutive securities not included in diluted income (loss) per common share	1,536,945	2,042,914	1,536,945	2,042,914

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Description of Business and Significant Accounting Policies (Details 6) (USD $) In Thousands, unless otherwise specified	3 Months Ended	6 Months Ended			12 Months Ended	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014 Receivables Distributors	Dec. 31, 2013 Receivables Distributors	Jun. 30, 2014 Revenue Distributors Biosurgery segment item	Jun. 30, 2013 Revenue Distributors Biosurgery segment item
Concentration of Risk
Number of significant distributors						1	1
Concentration of risk (as a percent)				11.00%	57.00%	11.00%	43.00%
Bad debt expense	$ 50	$ 50	$ (25)

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STATEMENTS OF CASH FLOWS (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013
Cash flows from operating activities:
Loss from continuing operations	$ (2,039)	$ (2,108)
Adjustments to reconcile loss from continuing operations to net cash used in operations of continuing operations:
Unrealized loss on trading securities	1,502
Depreciation and amortization	441	271
Non cash share-based payments	1,537	766
Provision for bad debts	50	(25)
Changes in operating assets and liabilities:
Accounts receivable	(9,481)	(3,349)
Inventory	(3,611)	(418)
Prepaid expenses, and other current assets	(208)	247
Lease reserves	(53)
Accounts payable, accrued expenses, and other current liabilities	3,195	1,750
Net cash used in operating activities of continuing operations	(8,667)	(2,866)
Discontinued operations
Loss from discontinued operations	(1,211)	(4,383)
Adjustments to reconcile loss from discontinued operations to net cash used in operations of discontinued operations:
Depreciation and amortization		98
Changes in operating assets and liabilities:
Accounts receivable and other current assets	91	31
Accounts payable and accrued expenses	(57)	38
Net cash used in operations of discontinued operations	(1,177)	(4,216)
Net cash used in operating activities	(9,844)	(7,082)
Cash flows from investing activities:
Purchases of property and equipment	(440)	(298)
Proceeds from sale of discontinued operations, net	15,000
Proceeds from sale of investments available for sale	8,307	6,600
Purchases of investments available for sale	(14,285)	(54)
Net cash provided by investing activities	8,582	6,248
Cash flows from financing activities:
Principal payments on capital lease obligations	(22)	(22)
Restricted cash	20
Proceeds from the exercise of options to purchase common stock	1,417	581
Windfall benefit from stock-based compensation	89
Net cash provided by financing activities	1,504	559
Net increase (decrease) in cash	242	(275)
Cash at beginning of period	2,416	1,854
Cash at end of period	$ 2,658	$ 1,579

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Discontinued Operations (Details) (USD $)	3 Months Ended		6 Months Ended		0 Months Ended	3 Months Ended		6 Months Ended		12 Months Ended	0 Months Ended	6 Months Ended				0 Months Ended	3 Months Ended	12 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013	Apr. 09, 2014 Therapeutics segment	Jun. 30, 2014 Therapeutics segment	Jun. 30, 2013 Therapeutics segment	Jun. 30, 2014 Therapeutics segment	Jun. 30, 2013 Therapeutics segment	Dec. 31, 2013 Therapeutics segment	Oct. 10, 2013 Purchase Agreement with Mesoblast	Jun. 30, 2014 Purchase Agreement with Mesoblast	Jun. 30, 2014 Purchase Agreement with Mesoblast Hedging instrument	Dec. 31, 2013 Purchase Agreement with Mesoblast Hedging instrument	Oct. 10, 2013 Purchase Agreement with Mesoblast Hedging instrument	Apr. 09, 2014 Purchase Agreement with Mesoblast Therapeutics segment	Dec. 31, 2013 Purchase Agreement with Mesoblast Therapeutics segment	Dec. 31, 2013 Purchase Agreement with Mesoblast Therapeutics segment	Oct. 10, 2013 Purchase Agreement with Mesoblast Therapeutics segment	Oct. 10, 2013 Purchase Agreement with Mesoblast Letter of intent payments Therapeutics segment	Oct. 10, 2013 Purchase Agreement with Mesoblast Initial closing payment Therapeutics segment	Oct. 10, 2013 Purchase Agreement with Mesoblast Additional closing payment, received in April 2014 Therapeutics segment	Oct. 10, 2013 Purchase Agreement with Mesoblast Delivery of all scheduled assets under the Transfer Agreement Therapeutics segment	Oct. 10, 2013 Purchase Agreement with Mesoblast First marketing authorization received in the U.S. Therapeutics segment	Oct. 10, 2013 Purchase Agreement with Mesoblast First marketing authorization received from France, Germany, or European Union Therapeutics segment	Oct. 10, 2013 Purchase Agreement with Mesoblast Completion of the enrollment of the Phase 3 Crohn's Trial or Mesoblast's election to discontinue the trial Therapeutics segment	Oct. 10, 2013 Purchase Agreement with Mesoblast Receipt of final data for the Crohn's trial or first marketing approval for Crohn's Therapeutics segment
Initial consideration and contingent additional payments provided under Purchase Agreement
Initial consideration																			$ 50,000,000	$ 3,500,000	$ 16,500,000	$ 15,000,000	$ 15,000,000
Contingent Consideration																			50,000,000					20,000,000	10,000,000	10,000,000	10,000,000
Total possible purchase price																			100,000,000
Holding period for any payments made in ordinary shares											1 year
Fair value of derivative instruments													3,200,000	1,700,000	1,700,000
Consideration in cash			15,000,000													15,000,000	20,000,000
Consideration in restricted stock																	15,000,000	15,000,000
Initial consideration payable in cash																	15,000,000	15,000,000
Gain on sale of discontinued operations										49,400,000
Transaction costs																		600,000
Income tax expense related to gain from sale of discontinued operation																		1,700,000
Current assets:
Accounts Receivable										91,000
Current liabilities:
Accounts payable and accrued expenses										57,000
Contingent milestone payments received					15,000,000	0				0		0
Royalty revenue						0				0
Summarized operating results
Revenue from collaborative research agreements and royalties						150,000	135,000	150,000	322,000
Operating expenses:
Research and development						104,000	2,196,000	177,000	4,220,000
Selling, general and administrative						72,000	241,000	587,000	485,000
Total operating expenses						176,000	2,437,000	764,000	4,705,000
Loss from discontinued operations before income tax expense						(26,000)	(2,302,000)	(614,000)	(4,383,000)
Income tax expense (benefit)	431,000	(358,000)	597,000	0		431,000	(358,000)	597,000
Loss income from discontinued operations	$ (457,000)	$ (1,944,000)	$ (1,211,000)	$ (4,383,000)		$ (457,000)	$ (1,944,000)	$ (1,211,000)	$ (4,383,000)

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Fair Value (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	6 Months Ended				6 Months Ended
	Jun. 30, 2014	Jun. 30, 2014 Price protection on restricted Mesoblast shares	Jun. 30, 2014 Recurring Level III	Dec. 31, 2013 Recurring Level III	Jun. 30, 2014 Recurring Price protection on restricted Mesoblast shares Level III
Significant inputs
Fair value			$ 3,160	$ 1,685	$ 15,000
Contractual life					1 year
Volatility (as a percent)					40.00%
Risk free interest rate (as a percent)					0.13%
Expected dividends					$ 0.00
Other transfers in and out of Level 3
Other transfers in Level 3	0
Other transfers out of Level 3	0
Rollforward of the fair value of Level 3 instruments
Balance at beginning of period		1,685
Change in Fair Value		1,475
Balance at end of period		$ 3,160

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CONDENSED BALANCE SHEETS (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Current assets:
Cash	$ 2,658	$ 2,416
Investments available for sale	45,759	39,508
Trading securities	15,584	17,086
Trade accounts receivable, net of reserves	16,890	7,459
Other receivables	256	15,265
Inventory	5,540	1,929
Prepaid expenses and other current assets	404	355
Current assets of discontinued operations		91
Total current assets	87,091	84,109
Property and equipment, net	1,895	1,896
Deferred tax asset		5,849
Restricted cash	223	243
Total assets	89,209	92,097
Current liabilities:
Accounts payable and accrued expenses	8,037	4,842
Capital lease obligations, current portion	45	45
Deferred tax liability		5,849
Current liabilities of discontinued operations		57
Total current liabilities	8,082	10,793
Other long-term liabilities	280	355
Total liabilities	8,362	11,148
Commitments and contingencies
Stockholders' equity
Common stock, $.001 par value, 90,000 shares authorized, 34,310 shares outstanding - 2014, 34,114 shares outstanding - 2013	34	34
Additional paid-in-capital	285,745	282,702
Accumulated other comprehensive (loss) income	72	(33)
Accumulated deficit	(205,004)	(201,754)
Total stockholders' equity	80,847	80,949
Total liabilities and stockholders' equity	$ 89,209	$ 92,097

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STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (USD $) In Thousands, except Share data, unless otherwise specified	Total	Common Stock	Additional Paid-in Capital	Accumulated Other Comprehensive (Loss) Income	Accumulated Deficit
Balance at Dec. 31, 2013	$ 80,949	$ 34	$ 282,702	$ (33)	$ (201,754)
Balance (in shares) at Dec. 31, 2013	34,114,000	34,114,603
Increase (Decrease) in Stockholders' Equity
Exercise of options to purchase common stock ($.40- $22.74 per share)	1,417		1,417
Exercise of options to purchase common stock (in shares)		168,197
Share-based payment-director services ($7.73 per share)	403		403
Share-based payment-director services (in shares)		27,000
Share-based payment-employee compensation	1,134		1,134
Net loss	(3,250)				(3,250)
Unrealized gain on investments available for sale	105			105
Windfall tax benefit from stock-based compensation	89		89
Balance at Jun. 30, 2014	$ 80,847	$ 34	$ 285,745	$ 72	$ (205,004)
Balance (in shares) at Jun. 30, 2014	34,310,000	34,309,800

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Inventory (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Inventory
Raw materials and supplies	$ 575	$ 387
Work-in-process	519	22
Finished goods	4,446	1,520
Total Biosurgery inventory	$ 5,540	$ 1,929

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Inventory (Tables)

6 Months Ended

Jun. 30, 2014

Inventory

Schedule of inventory for Biosurgery business

	June 30,2014		December 31,2013
	($000)		($000)
Inventory
Raw materials and supplies	$	575	$	387
Work-in-process	519		22
Finished goods	4,446		1,520
Total Biosurgery inventory	$	5,540	$	1,929

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Share-Based Compensation (Details) (USD $)	3 Months Ended	6 Months Ended	12 Months Ended
	Jun. 30, 2014 Stock options	Jun. 30, 2014 Stock options	Dec. 31, 2013 Stock options	Jun. 30, 2014 Amended and Restated 2006 Omnibus Plan	May 06, 2014 Amended and Restated 2006 Omnibus Plan	Jun. 30, 2014 Amended and Restated 1994 Stock Incentive Plan
Share-Based Compensation
Common stock reserved for issuance (in shares)				3,000,000	3,000,000	736,378
Shares available for future issuance				621,406		0
Proceeds for exercise of options	$ 1,417,000
Total unrecognized compensation costs related to non-vested stock options	4,000,000	4,000,000
Number of Shares
Outstanding at the beginning of the period (in shares)		1,233,767
Granted (in shares)		739,000
Exercised (in shares)		(168,197)
Canceled (in shares)		(267,625)
Outstanding at the end of the period (in shares)	1,536,945	1,536,945	1,233,767
Exercisable at the end of the period (in shares)	440,425	440,425
Weighted Average Exercise Price Per Share
Outstanding at the beginning of the period (in dollars per share)		$ 10.61
Granted (in dollars per share)		$ 14.98
Exercised (in dollars per share)		$ 8.43
Canceled (in dollars per share		$ 17.30
Outstanding at the end of the period (in dollars per share)	$ 11.79	$ 11.79	$ 10.61
Exercisable at the end of the period (in dollars per share)	$ 10.14	$ 10.14
Weighted Average Remaining Term Contractual Life
Outstanding at the beginning of the period		8 years	6 years 3 months 18 days
Outstanding at the end of the period		8 years	6 years 3 months 18 days
Exercisable at the end of the period		5 years 1 month 6 days
Aggregate Intrinsic Value
Outstanding at the beginning of the period (in dollars)		2,224,000
Exercised (in dollars)		1,083,000
Canceled (in dollars)		430,000
Outstanding at the end of the period (in dollars)	6,458,000	6,458,000	2,224,000
Exercisable at the end of the period (in dollars)	$ 2,789,000	$ 2,789,000
Weighted average fair value of options granted (in dollars per share)		$ 7.85

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Investments Available for Sale (Tables)

6 Months Ended

Jun. 30, 2014

Investments Available for Sale

Schedule of investments available for sale

	June 30, 2014											December 31, 2013
	($000s)											($000s)
				Unrealized										Unrealized
	Cost			Gain		Loss			Fair Value			Cost		Gain		Loss			Fair Value
Cash equivalents:
Money market funds & certificates of deposit	$	(28	)	$	—	$	—		$	(28	)	$	655	$	—	$	—		$	655
Corporate debt securities & commercial paper	$	15,425		$	53	$	(6	)	$	15,472		$	6,354	$	23	$	(10	)	$	6,367
	$	15,397		$	53	$	(6	)	$	15,444		$	7,009	$	23	$	(10	)	$	7,022
Investments:
Municipal securities	$	13,539		$	30	$	(27	)	$	13,542		$	12,507	$	9	$	(24	)	$	12,492
Agency obligations	$	—		$	—	$	—		$	—		$	6,704	$	5	$	(35	)	$	6,674
Mutual Funds	$	7,111		$	27	$	(12	)	$	7,126		$	4,076						$	4,076
US & International government agencies	$	9,640		$	7	$	—		$	9,647		$	9,244	$	—	$	—		$	9,244
	$	30,290		$	64	$	(39	)	$	30,315		$	32,531	$	14	$	(59	)	$	32,486
Investments available for sale	$	45,687		$	117	$	(45	)	$	45,759		$	39,540	$	37	$	(69	)	$	39,508

Schedule of maturities of investments available for sale

	June 30, 2014				December 31, 2013
	($000s)				($000s)
	Cost		Fair Value		Cost		Fair Value
Maturities:
Within 3-months	$	1,680	$	1,707	$	12,663	$	12,664
Between 3—12 months	5,247		5,256		1,623		1,610
More than 1 year	38,760		38,796		25,254		25,234
Investments available for sale	$	45,687	$	45,759	$	39,540	$	39,508

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STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Parenthetical) (USD $)	6 Months Ended
	Jun. 30, 2014
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Exercise of options to purchase common stock, per share, low end of range	$ 0.40
Exercise of options to purchase common stock, per share, high end of range	$ 22.74
Share-based payment-director services, per share	$ 7.73

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CONDENSED BALANCE SHEETS (Parenthetical) (USD $) In Thousands, except Per Share data, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
CONDENSED BALANCE SHEETS
Common stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common stock, shares authorized	90,000	90,000
Common stock, shares outstanding	34,310	34,114

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Fair Value

6 Months Ended

Jun. 30, 2014

Fair Value

Fair Value

9. Fair Value

Fair value is defined as the price at which an asset could be exchanged or a liability transferred (an exit price) in an orderly transaction between knowledgeable, willing parties in the principal or most advantageous market for the asset or liability. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied.

Financial assets recorded at fair value in the accompanying financial statements are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The levels are directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, and are as follows:

Level 1	Inputs are unadjusted, quoted prices in active markets for identical assets at the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
	The fair valued assets we hold that are generally included in this category are money market securities and the Mesoblast shares received in the disposition of the Therapeutics business, where fair value is based on publicly quoted prices.
Level 2	Inputs are other than quoted prices included in Level 1, which are either directly or indirectly observable for the asset or liability through correlation with market data at the reporting date and for the duration of the instrument’s anticipated life.
	The fair valued assets we hold that are generally included in this category are investment grade short-term securities and our derivative instrument.
Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities and which reflect management’s best estimate of what market participants would use in pricing the asset or liability at the reporting date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
	The only asset we hold that is included in this category is the price protection derivative related to the Mesoblast shares received in the disposition of our Therapeutics business.

When quoted prices in active markets for identical assets are available, we use these quoted market prices to determine the fair value of financial assets and classify these assets as Level 1. In other cases where a quoted market price for identical assets in an active market is either not available or not observable, we obtain the fair value from a third party vendor that uses pricing models, such as matrix pricing, to determine fair value. These financial assets would then be classified as Level 2. In the event quoted market prices were not available, we would determine fair value using broker quotes or an internal analysis of each investment’s financial statements and cash flow projections. In these instances, financial assets would be classified based upon the lowest level of input that is significant to the valuation. Thus, financial assets might be classified in Level 3 even though there could be some significant inputs that may be readily available.

The price protection derivative related to the Mesoblast shares is classified in Level 3.  Its fair value was determined through use of the Black-Scholes valuation method, a standard industry methodology for valuing equity options, because the price protection is economically equivalent to a put option on the Mesoblast shares at a price of $15 million. Significant inputs to the model include the following:

Fair value of underlying Mesoblast stock: $15,000,000

Contractual life: 1.0 year

Volatility: 40%

Risk-free interest rate: 0.13%

Expected dividends: $0

There have been no other transfers in and out of Level 3. The following table represents a rollforward of the fair value of Level 3 instruments, comprised solely of the limited price protection derivative related to the Mesoblast stock issued to us in connection with the sale of our former Therapeutics business:

	June 30, 2014
	($000s)
Balance at December 31, 2013	$	1,685
Change in Fair Value	1,475
Balance at June 30, 2014	$	3,160

Assets and liabilities measured at fair value on a recurring basis are summarized below as of June 30, 2014 and December 31, 2013:

	June 30, 2014
	($000s)
	Level I			Level II		Level III		Total
Assets
Investments available for sale
Cash & Cash Equivalents	$	(28	)	$	—	$	—	$	(28	)
Investments: Available for Sale Securities
Government Obligations	$	—		$	9,647	$	—	$	9,647
Mutual Funds	—			7,126		—		7,126
Agency Obligations	$	—		$	—	$	—	$	—
Corporate Debt Securities & Commercial Paper	—			15,472		—		15,472
Municipal Securities	$	—		$	13,542	$	—	$	13,542
Investments available for sale	$	(28	)	$	45,787	$	—	$	45,759
Derivative and securities received in business disposition
Restricted shares of Mesoblast common stock	$	12,424		$	—	$	—	$	12,424
Price protection on restricted Mesoblast shares	—			—		3,160		3,160
Derivative and securities received in business disposition	$	12,424		$	—	$	3,160	$	15,584
Total assets	$	12,396		$	45,787	$	3,160	$	61,343

	December 31, 2013
	($000s)
	Level I		Level II		Level III		Total
Assets
Investments available for sale
Cash & Cash Equivalents	$	655	$	—	$	—	$	655
Investments: Available for Sale Securities
Government Obligations	$	—	$	9,244	$	—	$	9,244
Mutual Funds	—		4,076		—		4,076
Agency Obligations	$	—	$	6,675	$	—	$	6,675
Corporate Debt Securities & Commercial Paper	—		6,367		—		6,367
Municipal Securities	$	—	$	12,491	$	—	$	12,491
Investments available for sale	$	655	$	38,853	$	—	$	39,508
Derivative and securities received in business disposition
Restricted shares of Mesoblast common stock	$	15,401	$	—	$	—	$	15,401
Price protection on restricted Mesoblast shares	—		—		1,685		1,685
Derivative and securities received in business disposition	$	—	$	15,401	$	1,685	$	17,086
Total assets	$	655	$	54,254	$	1,685	$	56,594

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Document and Entity Information	6 Months Ended
	Jun. 30, 2014	Aug. 08, 2014
Document and Entity Information
Entity Registrant Name	OSIRIS THERAPEUTICS, INC.
Entity Central Index Key	0001360886
Document Type	10-Q
Document Period End Date	Jun. 30, 2014
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		34,309,800
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q2

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Subsequent Events

6 Months Ended

Jun. 30, 2014

Subsequent Events

Subsequent Events

10. Subsequent Events

We evaluated our June 30, 2014 financial statements for subsequent events through the date the consolidated financial statements were issued.  We are not aware of any subsequent events which would require recognition or disclosure in the consolidated financial statements. Furthermore, there have been no material changes, outside of the normal course of business, to any of the contractual obligations disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

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STATEMENTS OF COMPREHENSIVE LOSS (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
STATEMENTS OF COMPREHENSIVE LOSS
Product revenues	$ 13,290	$ 5,291	$ 23,344	$ 9,346
Cost of product revenues	2,924	1,482	5,136	2,617
Gross profit	10,366	3,809	18,208	6,729
Operating expenses:
Research and development	1,055	1,132	1,725	2,089
Selling, general and administrative	9,341	4,157	16,576	6,560
Fees paid to related parties	36		185	62
Share based payments to related parties			403	180
Total operating expenses	10,432	5,289	18,889	8,891
Loss from operations	(66)	(1,480)	(681)	(2,162)
Other income (expense), net	(1,232)	25	(1,358)	54
Loss from continuing operations, before income taxes	(1,298)	(1,455)	(2,039)	(2,108)
Income tax expense	(130)	(358)	0	0
Loss from continuing operations	(1,428)	(1,813)	(2,039)	(2,108)
Discontinued operations:
Loss from operations of discontinued operations, net of income taxes of $597 and $431, respectively, for the six months and three months ended June 30, 2014 and $0 and ($358) for the six months and three months ended June 30, 2013, respectively	(457)	(1,944)	(1,211)	(4,383)
Net loss	(1,885)	(3,756)	(3,250)	(6,491)
Other comprehensive income (loss)
Unrealized gain (loss) on investments available for sale	17	(91)	105	(66)
Comprehensive loss	$ (1,868)	$ (3,847)	$ (3,145)	$ (6,557)
Basic and diluted loss per share
Loss from continuing operations (in dollars per share)	$ (0.04)	$ (0.06)	$ (0.06)	$ (0.06)
Loss from discontinued operations (in dollars per share)	$ (0.01)	$ (0.06)	$ (0.04)	$ (0.13)
Basic and diluted loss per share (in dollars per share)	$ (0.05)	$ (0.12)	$ (0.10)	$ (0.19)
Weighted average common shares (basic and diluted) (in shares)	34,264	32,958	34,207	32,935

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Property and Equipment

6 Months Ended

Jun. 30, 2014

Property and Equipment

Property and Equipment

4. Property and Equipment

Property and equipment at June 30, 2014 and December 31, 2013 are as follows:

	June 30, 2014			December 31,
	2014			2013
	(000s)			(000s)
Laboratory and manufacturing equipment	$	975		$	663
Computer hardware, furniture and fixtures	1,067			899
Leased assets	228			228
Leasehold improvements	4,260			4,260
	6,530			6,050
Accumulated depreciation and amortization	(4,635		)	(4,154		)
Property and equipment, net	$	1,895		$	1,896

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Segment Reporting

6 Months Ended

Jun. 30, 2014

Segment Reporting

Segment Reporting

3. Segment Reporting

Historically, we managed our business in two operating segments: our Biosurgery segment and our Therapeutics segment.

Our Biosurgery segment is focused on the development, manufacture and distribution of biologic products for wound care, cartilage repair, and orthopedics to harness the ability of cells and novel constructs to promote the body’s natural healing. We launched Grafix for commercial distribution in 2010, began distribution of Ovation in early fiscal 2011, and began distribution of Cartiform and OvationOS during 2013.  We have continued to increase our distribution volume of these products since their respective commercial launches and are developing additional products for future commercialization.

Our Therapeutics segment focused on developing and marketing products to treat medical conditions in the inflammatory and cardiovascular disease areas. Its operations have focused on clinical trials and discovery efforts.  As disclosed in Note 2 — Discontinued Operations, in October 2013 we entered into a Purchase Agreement with Mesoblast, pursuant to the terms of which we sold our culture expanded mesenchymal stem cell business, including Prochymal and other related assets.

Given the sale of our former Therapeutics segment, we now have only one operating segment.  As such, our financial statements present the assets, liabilities, and results of the former Therapeutics segment as discontinued operations for all periods presented, and our continuing operations now represent what was formerly our Biosurgery segment.

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Share-Based Compensation (Tables)

6 Months Ended

Jun. 30, 2014

Share-Based Compensation

Summary of stock option activity

			Weighted		Weighted
			Average		Average	Aggregate
	Number of		Exercise		Remaining	Intrinsic Value
	Shares		Price		Contractual Life	(in thousands)
Outstanding at January 1, 2014	1,233,767		$	10.61	6.3-years	$	2,224
Granted	739,000		$	14.98		$	—
Exercised	(168,197	)	$	8.43		$	1,083
Forfeited or canceled	(267,625	)	$	17.30		$	430
Balance, June 30, 2014	1,536,945		$	11.79	8.0-years	$	6,458
Exercisable at June 30, 2014	440,425		$	10.14	5.1-years	$	2,789

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Description of Business and Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2014

Description of Business and Significant Accounting Policies

Use of Estimates

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Due to the inherent uncertainty involved in making those assumptions, actual results could differ from those estimates. We believe that the most significant estimates that affect our financial statements are those that relate to deferred tax assets, inventory valuation, share-based compensation and the value of the derivative obtained in connection with the sale of our former Therapeutics business.

Reclassifications

Reclassifications

We have reclassified certain prior-year amounts for comparative purposes. These reclassifications did not affect our results of operations or financial positions for the years presented.

Cash and Cash Equivalents

Cash and Cash Equivalents

Amounts listed as cash on our balance sheets are maintained in depository accounts at a commercial bank. Cash and cash equivalents, which include highly liquid investments with maturities of three months or less when purchased, held in our brokerage investment accounts are classified as investments available for sale, as the amounts represent investments that have matured and are anticipated to be reinvested in debt securities in the near future, and are disclosed at fair value, which approximates cost.

Investments Available for Sale

Investments Available for Sale

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

Investments available for sale are evaluated periodically to determine whether a decline in their value is “other than temporary.” The term “other than temporary” is not intended to indicate a permanent decline in value. Rather, it means that the prospects for near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the security. We review criteria such as the magnitude and duration of the decline, as well as the reasons for the decline, to predict whether the loss in value is other than temporary. If a decline in value is determined to be other than temporary, the carrying value of the security is reduced and a corresponding charge to earnings is recognized.

Trading Securities - Derivative and Securities Received in Business Disposition

Trading Securities - Derivative and Securities Received in Business Disposition

As discussed in Note 2 — Discontinued Operations, we disposed of our Therapeutics segment in October 2013.  A portion of the consideration for the sale of that business was stock of Mesoblast Limited (“Mesoblast”), the parent of the purchaser.  We are required to hold that stock for one year from the date of receipt.  We currently intend to dispose of the Mesoblast stock as soon as we are able to do so in December 2014.  As such, we have reflected the investment as a current asset in Trading Securities.  Mesoblast is a public company and its stock is traded on the Australian stock exchange.

The Mesoblast stock is subject to limited price protection for the one year required holding period. To the extent the value of those shares decreases during the holding period, Mesoblast is required to pay us for the decrease in value.  This payment is to be made at least one half in cash and at the option of Mesoblast, up to one half in additional shares of Mesoblast stock. Any additional Mesoblast stock will also have to be held for one year during which period there is no further price protection. The price protection is accounted for as a derivative under ASC 815, Derivatives and Hedging, and, as such is recorded on the balance sheet at fair value, with changes in value recognized in Other income (expense), net. We have elected to measure the Mesoblast stock at fair value with changes in fair value reflected in Other income (expense), net, as permitted under ASC 825-10, Financial Instruments — Fair Value Option.

Our only derivative instrument is the price protection guarantee regarding the payment received in restricted shares of Mesoblast stock.  We do not hold derivative financial instruments for trading purposes.

Restricted Cash

Restricted Cash

We periodically are required under the terms of various agreements to provide letters of credit which are collateralized by cash deposits. The restricted cash relates to a letter of credit that we caused to be issued in lieu of a security deposit under the operating lease for our Columbia, Maryland facility.

Trade Accounts Receivable

Trade Accounts Receivable

Trade accounts receivable are reported at their net realizable value. We charge off uncollectible receivables when the likelihood of collection is remote. We set credit terms with individual customers, and consider receivables outstanding longer than the time specified in the respective customer’s contract, typically 45-days, to be past due. As of June 30, 2014 and December 31, 2013, accounts receivable in the accompanying balance sheets are reported net of a $128,000 and $78,000 allowance for doubtful accounts, respectively. We believe the reported amounts are fully collectible. Trade accounts receivable balances are not collateralized. We incurred $50,000 of bad debt expense in the first half of fiscal 2014. We did not incur any bad debts expense in the first half of fiscal 2013.

Other Receivables

Other Receivables

Other receivables include reimbursements due us from Mesoblast for goods and services provided to them in connection with the Transition Services Agreement entered into as part of the sale transaction.  The Transition Services Agreement has been extended so that we will provide some services to Mesoblast through October 10, 2014, and will continue to be reimbursed for the costs incurred. Other receivables also include accrued interest from the company’s investments and federal income tax refunds expected.

Inventory

Inventory

We began carrying inventory of our Biosurgery products on our balance sheet following commercial launch of such products. Inventory consists of raw materials, biologic products in process, and products available for distribution. We determine our inventory values using the first-in, first-out method. Inventory is valued at the lower of cost or market, and excludes units that we anticipate distributing for clinical evaluation. Materials and supplies purchased for product development and product improvement activities are expensed as incurred.

Property and Equipment

Property and Equipment

Property and equipment, including improvements that extend useful lives, are valued at cost, while maintenance and repairs are charged to operations as incurred. Depreciation is calculated using the straight-line method based on estimated useful lives ranging from three to seven years for furniture, equipment and internal use software. Leasehold improvements and assets under capital leases are amortized over the shorter of the estimated useful life of the asset or the term of the lease.

Valuation of Long-lived Assets

Valuation of Long-lived Assets

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

Biosurgery Revenue Recognition

Biosurgery Revenue Recognition

We recognize revenue from product distribution when title passes to the customer.  Title usually passes when the product is shipped to the customer and leaves our loading dock.  In some situations, we store consigned inventory on site in freezers at hospital or clinic facilities and title  passes to the customer when the product is used in a surgical procedure.  In these instances we recognize the revenue upon notification of the completed surgical procedure.  We verify the condition and status of all consigned inventory on at least a quarterly basis.   Due to the nature of our products and the need to ensure they are maintained at the proper frozen temperature, we generally do not allow product returns.

Therapeutics Revenue Recognition

Therapeutics Revenue Recognition

In our former Therapeutics business, we evaluated revenues from agreements that have multiple elements to determine whether the components of the arrangement represent separate units of accounting. To recognize a delivered item in a multiple element arrangement, the delivered items must have value on a standalone basis and the delivery or performance must be probable and within our control for any delivered items that have a right of return. The determination of whether multiple elements of a collaboration agreement meet the criteria for separate units of accounting requires us to exercise judgment. We account for the activities of our former Therapeutics business as discontinued operations.

Revenues from research licenses associated with our former Therapeutics business were recognized as earned upon either the incurring of reimbursable expenses directly related to the particular research plan or the completion of certain development milestones as defined within the terms of the agreement. Payments received in advance of research performance were designated as deferred revenue. Non-refundable upfront license fees and certain other related fees associated with our former Therapeutics business were recognized on a straight-line basis over the development periods of the contract deliverables. Fees associated with substantive at risk performance based milestones are recognized as revenue upon their completion, as defined in the respective agreements. Incidental assignment of technology rights were recognized as revenue when and if it was earned and received.

Research and Development Costs

Research and Development Costs

We expense internal and external research and development (“R&D”) costs, including costs of funded R&D arrangements and the manufacture of clinical batches of Biosurgery products used in clinical trials, in the period incurred.

Income Taxes

Income Taxes

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

We recognize in our financial statements the impact of a tax position, if that position is more likely than not to be sustained upon an examination, based on the technical merits of the position. Interest and penalties related to income tax matters are recorded as income tax expense. At June 30, 2014 and December 31, 2013 we had no accruals for interest or penalties related to income tax matters.

Income per Common Share

Income per Common Share

Basic income per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted income per common share adjusts basic income per share for the potentially dilutive effects of common share equivalents, using the treasury stock method, and includes the incremental effect of shares that would be issued upon the assumed exercise of stock options and warrants.

Diluted loss per common share for the three and six months ended June 30, 2014 excludes all 1,536,945 of our outstanding options as of that date, as their impact on our net loss is anti-dilutive.

Diluted loss per common share for the three and six months ended June 30, 2013 excludes the 1,000,000 shares issuable upon the exercise of an outstanding warrant, and all 2,042,914 of our outstanding options as of that date, as their impact on our net loss is anti-dilutive.

Share-Based Compensation

Share-Based Compensation

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

We recognize all share-based payments to employees and non-employee directors in our financial statements based on their grant date fair values, calculated using the Black-Scholes option pricing model. Compensation expense related to share-based awards is recognized on a straight-line basis for each vesting tranche based on the value of share awards that are expected to vest on the grant date, which is revised if actual forfeitures differ materially from original expectations.

Comprehensive Income (Loss)

Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income and all changes in equity from non-stockholder sources, which consist of changes in unrealized gains and losses on investments.

Concentration of Risk

Concentration of Risk

We maintain cash and short-term investment balances in accounts that exceed federally insured limits, although we have not experienced any losses on such accounts. We also invest excess cash in investment grade securities, generally with maturities of one year or less.

We have historically provided credit in the normal course of business to contract counterparties and to the distributors of our product. Trade accounts receivable in the accompanying balance sheets consist primarily of amounts due from end user customers and distributors of our Biosurgery products within the United States. During the first half of fiscal 2014 and 2013, revenues from one of the distributors of our Biosurgery products, Stability Biologics, comprised approximately 11% and 43%, respectively, of our total Biosurgery product revenues. As of June 30, 2014 and December 31, 2013, receivables from this distributor comprised 11% and 57%, respectively, of our trade receivables. We expect all of our reported receivables to be fully collected. As discussed under “Trade Accounts Receivable,” we have incurred $50,000 bad debt expense for the three months ended June 30, 2014. We did not incur any bad debts expense in the first half of fiscal 2013.

Recently Adopted Accounting Guidance at June 30, 2014

Recently Adopted Accounting Guidance at June 30, 2014

In July 2013, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) related to the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists.  The ASU requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as either a reduction to a deferred tax asset or separately as a liability depending on the existence, availability and/or use of an operating loss carryforward, a similar tax loss, or a tax credit carryforward. This ASU was adopted at January 1, 2014. This ASU did not have an impact on our consolidated financial statements as we currently do not have any unrecognized tax benefits in the same jurisdictions in which we have tax loss or credit carryovers.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” which requires an entity to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services.  The new standard will replace most of the existing revenue recognition standards in U.S. GAAP when it becomes effective on January 1, 2017.  Early adoption is not permitted.  The new standard can be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of the change recognized at the date of the initial application.  We are currently assessing the impact the adoption of ASU 2014-09 will have on our condensed consolidated financial position, results of operations and cash flows.

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Income Taxes

6 Months Ended

Jun. 30, 2014

Income Taxes

Income Taxes

7. Income Taxes

We calculate our interim tax provision in accordance with the guidance for accounting for income taxes in interim periods. At the end of each interim period, we estimate the annual effective tax rate and apply that tax rate to our ordinary quarterly pre-tax income from continuing operations. The tax expense or benefit related to significant, unusual or extraordinary discrete events (including discontinued operations) during the interim period is recognized in the interim period in which those events occurred. In addition, the effect of changes in enacted tax laws or rates or tax status is recognized in the interim period in which the change occurs.  For the six months ended June 30, 2014 and 2013, there was no income tax expense or benefit from continuing operations due to losses from both continuing operations and discontinued operations for which no benefit was provided.

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Inventory

6 Months Ended

Jun. 30, 2014

Inventory

Inventory

5. Inventory

As of June 30, 2014 and December 31, 2013, inventory for our Biosurgery business consists of the following:

	June 30,2014		December 31,2013
	($000)		($000)
Inventory
Raw materials and supplies	$	575	$	387
Work-in-process	519		22
Finished goods	4,446		1,520
Total Biosurgery inventory	$	5,540	$	1,929

Prior to the transaction described in Note 2—Discontinued Operations, we did not carry any inventory for our Therapeutics products, as we had yet to launch Prochymal for commercial distribution.

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Share-Based Compensation

6 Months Ended

Jun. 30, 2014

Share-Based Compensation

Share-Based Compensation

6. Share-Based Compensation

In April 2006, we adopted our 2006 Omnibus Plan. We amended and restated this plan in 2008 and 2010, and amended it further in 2012, in each case to, among other things, increase the number of shares available for grant. Most recently, as our 2014 Annual Meeting of Stockholders, held on May 6, 2014, an amendment to the Amended and Restated 2006 Omnibus Plan was approved that, among other things, increased the maximum number of shares that may be awarded under the Plan to 3,000,000 shares. In addition, we had previously established our Amended and Restated 1994 Stock Incentive Plan. Both Plans authorize the issuance of various forms of stock-based awards, including incentive and non-qualified stock options, stock purchase rights, stock appreciation rights and restricted and unrestricted stock awards. A total of 3,000,000 shares of our common stock have been reserved for issuance under the Amended and Restated 2006 Omnibus Plan, and 736,378 shares were reserved under our Amended and Restated 1994 Stock Incentive Plan. We ceased all grants under the Amended and Restated 1994 Stock Incentive Plan concurrent with our initial public offering in August 2006. As a result, no shares are currently available for future awards under the Amended and Restated 1994 Stock Incentive Plan. At June 30, 2014, there were 621,406 shares available for future awards under the Amended and Restated 2006 Omnibus Plan.

In connection with the stock options exercised during the three months ended June 30, 2014, we received cash proceeds of $1,417,000. At June 30, 2014,  there was $4.0 million of total unrecognized compensation costs related to non-vested stock options, which is expected to be recognized through fiscal 2018.

A summary of stock option activity for the three months ended June 30, 2014 is as follows:

			Weighted		Weighted
			Average		Average	Aggregate
	Number of		Exercise		Remaining	Intrinsic Value
	Shares		Price		Contractual Life	(in thousands)
Outstanding at January 1, 2014	1,233,767		$	10.61	6.3-years	$	2,224
Granted	739,000		$	14.98		$	—
Exercised	(168,197	)	$	8.43		$	1,083
Forfeited or canceled	(267,625	)	$	17.30		$	430
Balance, June 30, 2014	1,536,945		$	11.79	8.0-years	$	6,458
Exercisable at June 30, 2014	440,425		$	10.14	5.1-years	$	2,789

The weighted fair value of options granted during the six months ended June 30, 2014 was $7.85 per share.

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Investments Available for Sale

6 Months Ended

Jun. 30, 2014

Investments Available for Sale

Investments Available for Sale

8. Investments Available for Sale

Investments available for sale consisted of the following as of June 30, 2014 and December 31, 2013:

	June 30, 2014											December 31, 2013
	($000s)											($000s)
				Unrealized										Unrealized
	Cost			Gain		Loss			Fair Value			Cost		Gain		Loss			Fair Value
Cash equivalents:
Money market funds & certificates of deposit	$	(28	)	$	—	$	—		$	(28	)	$	655	$	—	$	—		$	655
Corporate debt securities & commercial paper	$	15,425		$	53	$	(6	)	$	15,472		$	6,354	$	23	$	(10	)	$	6,367
	$	15,397		$	53	$	(6	)	$	15,444		$	7,009	$	23	$	(10	)	$	7,022
Investments:
Municipal securities	$	13,539		$	30	$	(27	)	$	13,542		$	12,507	$	9	$	(24	)	$	12,492
Agency obligations	$	—		$	—	$	—		$	—		$	6,704	$	5	$	(35	)	$	6,674
Mutual Funds	$	7,111		$	27	$	(12	)	$	7,126		$	4,076						$	4,076
US & International government agencies	$	9,640		$	7	$	—		$	9,647		$	9,244	$	—	$	—		$	9,244
	$	30,290		$	64	$	(39	)	$	30,315		$	32,531	$	14	$	(59	)	$	32,486
Investments available for sale	$	45,687		$	117	$	(45	)	$	45,759		$	39,540	$	37	$	(69	)	$	39,508

The cash equivalents at June 30, 2014 was negative and reflects the investment advisor’s over subscription of other investments for several days.  The cash equivalents at December 31, 2013 represent highly liquid investments with maturities of three months or less when purchased that are held in our brokerage investment accounts.  They are classified as investments available for sale as the amounts represent investments that have matured and are anticipated to be reinvested in debt securities in the near future.

The following table summarizes maturities of our investments available for sale as of June 30, 2014 and December 31, 2013:

	June 30, 2014				December 31, 2013
	($000s)				($000s)
	Cost		Fair Value		Cost		Fair Value
Maturities:
Within 3-months	$	1,680	$	1,707	$	12,663	$	12,664
Between 3—12 months	5,247		5,256		1,623		1,610
More than 1 year	38,760		38,796		25,254		25,234
Investments available for sale	$	45,687	$	45,759	$	39,540	$	39,508

Realized gains and investment income earned on investments available for sale were $148,000 and $55,000, respectively, for the six months ended June 30, 2014 and 2013, and have been included as a component of “Other income, net” in the accompanying financial statements.

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Property and Equipment (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Property and Equipment
Property and equipment, gross	$ 6,530	$ 6,050
Accumulated depreciation and amortization	(4,635)	(4,154)
Property and equipment, net	1,895	1,896
Laboratory and manufacturing equipment
Property and Equipment
Property and equipment, gross	975	663
Computer hardware, furniture and fixtures
Property and Equipment
Property and equipment, gross	1,067	899
Leased assets
Property and Equipment
Property and equipment, gross	228	228
Leasehold improvements
Property and Equipment
Property and equipment, gross	$ 4,260	$ 4,260

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Property and Equipment (Tables)

6 Months Ended

Jun. 30, 2014

Property and Equipment

Schedule of property and equipment

	June 30, 2014			December 31,
	2014			2013
	(000s)			(000s)
Laboratory and manufacturing equipment	$	975		$	663
Computer hardware, furniture and fixtures	1,067			899
Leased assets	228			228
Leasehold improvements	4,260			4,260
	6,530			6,050
Accumulated depreciation and amortization	(4,635		)	(4,154		)
Property and equipment, net	$	1,895		$	1,896

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Description of Business and Significant Accounting Policies(Details)	0 Months Ended	6 Months Ended
	Oct. 09, 2013 item	Jun. 30, 2014 item
Description of Business and Significant Accounting Policies
Number of business segments	2	1

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Fair Value (Details 2) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Assets
Investments available for sale	$ 45,759	$ 39,508
Recurring | Level I
Assets
Investments available for sale	(28)	655
Derivative instruments	12,424
Total assets	12,396	655
Recurring | Level II
Assets
Investments available for sale	45,787	38,853
Total assets	45,787	54,254
Recurring | Level III
Assets
Derivative instruments	3,160	1,685
Total assets	3,160	1,685
Recurring | Total
Assets
Investments available for sale	45,759	39,508
Derivative instruments	15,584	17,086
Total assets	61,343	56,594
Recurring | Cash equivalents | Level I
Assets
Investments available for sale	(28)	655
Recurring | Cash equivalents | Total
Assets
Investments available for sale	(28)	655
Recurring | Government Obligations | Level II
Assets
Investments available for sale	9,647	9,244
Recurring | Government Obligations | Total
Assets
Investments available for sale	9,647	9,244
Recurring | Mutual Funds | Level II
Assets
Investments available for sale	7,126	4,076
Recurring | Mutual Funds | Total
Assets
Investments available for sale	7,126	4,076
Recurring | Agency Obligations | Level II
Assets
Investments available for sale		6,675
Recurring | Agency Obligations | Total
Assets
Investments available for sale		6,675
Recurring | Corporate debt securities & commercial paper | Level II
Assets
Investments available for sale	15,472	6,367
Recurring | Corporate debt securities & commercial paper | Total
Assets
Investments available for sale	15,472	6,367
Recurring | Municipal Securities | Level II
Assets
Investments available for sale	13,542	12,491
Recurring | Municipal Securities | Total
Assets
Investments available for sale	13,542	12,491
Recurring | Restricted shares of Mesoblast common stock | Level I
Assets
Fair value of securities	12,424	15,401
Recurring | Restricted shares of Mesoblast common stock | Total
Assets
Fair value of securities	12,424	15,401
Recurring | Price protection on restricted Mesoblast shares | Level III
Assets
Derivative instruments	15,000
Recurring | Price protection on restricted Mesoblast shares | Level III | Hedging instrument
Assets
Derivative instruments	3,160	1,685
Recurring | Price protection on restricted Mesoblast shares | Total | Hedging instrument
Assets
Derivative instruments	$ 3,160	$ 1,685

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STATEMENTS OF COMPREHENSIVE LOSS (Parenthetical) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
STATEMENTS OF COMPREHENSIVE LOSS
Income (loss) from operations of discontinued operations, income taxes	$ 431	$ (358)	$ 597	$ 0

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Discontinued Operations

6 Months Ended

Jun. 30, 2014

Discontinued Operations

Discontinued Operations

2. Discontinued Operations

On October 10, 2013, we entered into a Purchase Agreement with a wholly-owned subsidiary of Mesoblast Limited, pursuant to the terms of which we sold our culture expanded mesenchymal stem cell (ceMSC) business, including Prochymal and other related assets. The Purchase Agreement provides for payment to us of $50.0 million in initial consideration, and payment of up to an additional $50.0 million upon the achievement by Mesoblast of certain clinical and regulatory milestones. Additionally, we will be entitled to earn low single to double digit cash royalties on future sales by Mesoblast of Prochymal and other products utilizing the acquired ceMSC technology.

The Purchase Agreement provides for the $50.0 million of initial payments and up to $50.0 million of contingent additional payments to us upon our achievement of milestone events, as follows:

	Amount
Milestone	($000)
Initial consideration
Letter of intent payments	$	3,500
Initial closing payment	16,500
Additional closing payment, received in April 2014	15,000
Delivery of all scheduled assets under the Transfer Agreement	15,000
Total initial consideration	50,000
Contingent Consideration
First marketing authorization received in the U.S.	20,000
First marketing authorization received from France, Germany, or European Union.	10,000
Completion of the enrollment of the Phase 3 Crohn’s Trial or Mesoblast’s election to discontinue the trial	10,000
Receipt of final data for the Crohn’s trial or first marketing approval for Crohn’s	10,000
Total conditional consideration	50,000
Total possible purchase price	$	100,000

Of the $50 million in total initial consideration, we had received at December 31, 2013, payments of $20 million in cash, and $15 million in Mesoblast ordinary shares, which were delivered to us upon completed delivery of the ceMSC assets.  The remaining $15 million of the initial consideration was received in cash on April 9, 2014.  The Mesoblast shares received by us are subject to a one year holding period from the date of receipt, but are afforded limited downside protection for a drop in the Mesoblast share price over the holding period.  We have evaluated this downside protection, and determined that it meets the criteria of a derivative instrument.  The fair value of the protection at the time of the disposition of our Therapeutics business was $1.7 million.  We recognized the price protection derivative as an asset at June 30, 2014 and December 31, 2013 at its then fair value of $3.2 million and $1.7 million respectively. The initial $1.7 million value of the derivative was reflected in the calculation of the gain on sale of the Therapeutics business.

Our ability to receive the second $50.0 million is subject to satisfaction of the milestones indicated above, all of which are largely dependent upon the clinical and regulatory success of Mesoblast and other factors not in our control. These include many, if not all, of the risks and uncertainties that our ceMSC business was subject to prior to its sale to Mesoblast, including product development, efficacy and regulatory risks. We have received no such payments thus far, nor do we have any expectation of receiving any such payments in the foreseeable future. Our ability to earn royalties from Mesoblast is subject to these same risks and will require performance by Mesoblast that results in its meeting some or all of the milestones referred to above, and is thereafter also dependent upon the commercial success of Mesoblast’s ceMSC business. Royalties, if any, are payable to us in cash. Any portion of the second $50.0 million that becomes payable to us will be payable, at the discretion of Mesoblast, in Mesoblast ordinary shares, based on a then current valuation of such shares.  Any such Mesoblast ordinary shares that we receive will also be subject to a one year holding period, with the same limited downside protection described above.

We eliminated the Therapeutics segment from our continuing operations as a result of the disposal transaction and have presented the assets, liabilities, and results of the segment’s operations as a discontinued operation for all periods.  Our continuing operations now represent the portion of our business previously referred to as our Biosurgery segment.

As a result of the disposal of our Therapeutics segment, we have presented the assets, liabilities, and results of the segment’s operations as a discontinued operation for all periods presented.  Our only continuing involvement in our former Therapeutics business is to wind down our prior research and development activities and to assist Mesoblast in absorbing this business under a Transition Services Agreement entered into as part of the Purchase Agreement. The only continuing cash flows to us related to our former Therapeutics business will be the contingent consideration and royalties provided for under the purchase agreement, as described above.  We received no such contingent payments or royalties in the second quarter of fiscal 2014 or full fiscal year 2013.

We recognized a gain of approximately $49.4 million of the sale of discontinued operations during the year ended December 31, 2013, representing the $50.0 million in initial payments received under the Purchase Agreement and the $1.7 million fair value of the derivative instrument received, net of transaction costs of approximately $600,000, including legal, accounting and advisory fees, and income tax expense of $1.7 million.

The net assets allocable to the Therapeutics business at June 30, 2014 and December 31, 2013 were as follows:

	June 30,2014		December 31, 2013
	($000s)		($000s)
Current assets:
Accounts receivable	$	—	$	91
Current liabilities:
Accounts payable and accrued expenses	$	—	$	57

Summarized operating results of discontinued operations are as follows:

	($000s)						($000s)
	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2014			2013			2014			2013
Revenue from collaborative research agreements and royalties	$	150		$	135		$	150		$	322
Operating expenses:
Research and development	104			2,196			$	177		4,220
Selling, general and administrative	72			241			587			485
	176			2,437			764			4,705
Loss income from discontinued operations before income tax expense	(26		)	(2,302		)	(614		)	(4,383		)
Income tax expense (benefit)	431			(358		)	597			—
Loss income from discontinued operations	$	(457	)	$	(1,944	)	$	(1,211	)	$	(4,383	)

Revenues from our former Therapeutics business have historically consisted primarily of collaborative research agreements and royalties. Because of the disposition of our Therapeutics business in 2013, we will no longer incur related research and development expenses related to these discontinued operations. Our discontinued operations earned royalty revenues and cost reimbursement under an adult expanded access program. Royalties were earned on the sale of human mesenchymal stem cells sold for research purposes. We recognized this revenue as sales were made.

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Description of Business and Significant Accounting Policies (Details 2) (Purchase Agreement with Mesoblast)	0 Months Ended	6 Months Ended
	Oct. 10, 2013	Jun. 30, 2014	Jun. 30, 2014
Purchase Agreement with Mesoblast
Derivative and Securities Received in Business Disposition
Holding period for any payments made in ordinary shares	1 year
Holding period of stock subject to limited price protection			1 year
Aggregate compensation to be received for decrease in value of shares payable in cash (as a percent)		50.00%
Aggregate compensation to be received for decrease in value of shares (as a percent)		100.00%

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Investments Available for Sale (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Investments available for sale
Cost	$ 45,687	$ 39,540
Unrealized Gain	117	37
Unrealized Loss	(45)	(69)
Fair value of investments available for sale	45,759	39,508
Investments
Investments available for sale
Cost	30,290	32,531
Unrealized Gain	64	14
Unrealized Loss	(39)	(59)
Fair value of investments available for sale	30,315	32,486
Municipal Securities
Investments available for sale
Cost	13,539	12,507
Unrealized Gain	30	9
Unrealized Loss	(27)	(24)
Fair value of investments available for sale	13,542	12,492
Agency Obligations
Investments available for sale
Cost		6,704
Unrealized Gain		5
Unrealized Loss		(35)
Fair value of investments available for sale		6,674
Mutual Funds
Investments available for sale
Cost	7,111	4,076
Unrealized Gain	27
Unrealized Loss	(12)
Fair value of investments available for sale	7,126	4,076
US & International government agencies
Investments available for sale
Cost	9,640	9,244
Unrealized Gain	7
Fair value of investments available for sale	9,647	9,244
Cash equivalents
Investments available for sale
Cost	15,397	7,009
Unrealized Gain	53	23
Unrealized Loss	(6)	(10)
Fair value of investments available for sale	15,444	7,022
Money market funds & certificates of deposit
Investments available for sale
Cost	(28)	655
Fair value of investments available for sale	(28)	655
Corporate debt securities & commercial paper
Investments available for sale
Cost	15,425	6,354
Unrealized Gain	53	23
Unrealized Loss	(6)	(10)
Fair value of investments available for sale	$ 15,472	$ 6,367

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Discontinued Operations (Tables)

6 Months Ended

Jun. 30, 2014

Discontinued Operations

Schedule of initial consideration and contingent additional payments upon achievement of milestone events provided under Purchase Agreement

	Amount
Milestone	($000)
Initial consideration
Letter of intent payments	$	3,500
Initial closing payment	16,500
Additional closing payment, received in April 2014	15,000
Delivery of all scheduled assets under the Transfer Agreement	15,000
Total initial consideration	50,000
Contingent Consideration
First marketing authorization received in the U.S.	20,000
First marketing authorization received from France, Germany, or European Union.	10,000
Completion of the enrollment of the Phase 3 Crohn’s Trial or Mesoblast’s election to discontinue the trial	10,000
Receipt of final data for the Crohn’s trial or first marketing approval for Crohn’s	10,000
Total conditional consideration	50,000
Total possible purchase price	$	100,000

Schedule of net assets allocable to the Therapeutics business

	June 30,2014		December 31, 2013
	($000s)		($000s)
Current assets:
Accounts receivable	$	—	$	91
Current liabilities:
Accounts payable and accrued expenses	$	—	$	57

Summary of operating results of discontinued operations

	($000s)						($000s)
	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2014			2013			2014			2013
Revenue from collaborative research agreements and royalties	$	150		$	135		$	150		$	322
Operating expenses:
Research and development	104			2,196			$	177		4,220
Selling, general and administrative	72			241			587			485
	176			2,437			764			4,705
Loss income from discontinued operations before income tax expense	(26		)	(2,302		)	(614		)	(4,383		)
Income tax expense (benefit)	431			(358		)	597			—
Loss income from discontinued operations	$	(457	)	$	(1,944	)	$	(1,211	)	$	(4,383	)