10-Q 1 osir-20150930x10q.htm 10-Q osir_Current_Folio_10Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2015

 

Or

 

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   No 

 

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  No 

 

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

 

Accelerated filer 

 

 

 

Non-accelerated filer

 

Smaller reporting company

(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    No 

 

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 November 13, 2015

Common Stock, par value $0.001 per share

 

34,452,640

 

 

 

 

 

 


 

OSIRIS THERAPEUTICS, INC.

 

INDEX

 

 

 

 

 

 

 

    

 

    

Page

 

 

 

 

 

 

PART I – FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1. 

 

Financial Statements (unaudited, except for the Balance Sheet as of December 31, 2014, which was derived from audited financial statements)

 

 

 

Condensed Balance Sheets — September 30, 2015 and December 31, 2014

 

 

 

Condensed Statements of Comprehensive Income (Loss) — three and nine months ended September 30, 2015 and 2014

 

 

 

Condensed Statement of Changes in Stockholders’ Equity

 

 

 

Condensed Statements of Cash Flows — nine months ended September 30, 2015 and 2014

 

 

 

Notes to Condensed Financial Statements

 

 

 

 

 

 

Item 2. 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

25 

 

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures About Market Risk

 

32 

 

 

 

 

 

Item 4. 

 

Controls and Procedures

 

33 

 

 

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

 

 

Item 1. 

 

Legal Proceedings

 

35 

Item 1A. 

 

Risk Factors

 

35 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

35 

Item 3. 

 

Defaults Upon Senior Securities

 

35 

Item 4. 

 

Mine Safety Disclosures

 

35 

Item 5. 

 

Other Information

 

35 

Item 6. 

 

Exhibits

 

35 

 

 

 

 

 

Signatures 

 

 

 

36 

 

 

 

2


 

PART I -- FINANCIAL INFORMATION

 

Item 1.Financial Statements — Unaudited

 

OSIRIS THERAPEUTICS, INC.

CONDENSED BALANCE SHEETS

(amounts in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

    

September 30, 2015

    

December 31, 2014

 

 

 

(unaudited)

 

(restated)

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash

 

$

15,799

 

$

2,208

 

Investments available for sale

 

 

24,452

 

 

37,305

 

Trading securities

 

 

3,090

 

 

10,591

 

Trade accounts receivable, net of reserves

 

 

37,857

 

 

23,235

 

Other receivables

 

 

562

 

 

9,951

 

Inventory

 

 

15,818

 

 

11,160

 

Prepaids and other current assets

 

 

1,167

 

 

650

 

Total current assets

 

 

98,745

 

 

95,100

 

Property and equipment, net

 

 

2,180

 

 

2,087

 

Other assets

 

 

95

 

 

95

 

Total assets

 

$

101,020

 

$

97,282

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

9,579

 

$

8,854

 

Capital lease obligations, current portion

 

 

45

 

 

45

 

Dividends payable

 

 

6,890

 

 

 —

 

Deferred commissions payable, current portion

 

 

1,667

 

 

1,667

 

Total current liabilities

 

 

18,181

 

 

10,566

 

Other long-term liabilities

 

 

2,995

 

 

3,589

 

Total liabilities

 

 

21,176

 

 

14,155

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Common stock, $.001 par value, 90,000 shares authorized, 34,453 shares outstanding—2015, 34,346 shares outstanding—2014

 

 

35

 

 

35

 

Additional paid-in-capital

 

 

283,964

 

 

287,525

 

Accumulated other comprehensive loss

 

 

(94)

 

 

(54)

 

Accumulated deficit

 

 

(204,061)

 

 

(204,379)

 

Total stockholders’ equity

 

 

79,844

 

 

83,127

 

Total liabilities and stockholders’ equity

 

$

101,020

 

$

97,282

 

 

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

3


 

OSIRIS THERAPEUTICS, INC.

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Unaudited

(amounts in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

    

2015

    

2014

    

2015

    

2014

 

Product revenues

 

$

25,331

 

$

17,204

 

$

67,277

 

$

40,548

 

Cost of product revenues

 

 

5,390

 

 

3,785

 

 

14,822

 

 

8,921

 

Gross profit

 

 

19,941

 

 

13,419

 

 

52,455

 

 

31,627

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

2,306

 

 

1,207

 

 

6,233

 

 

2,932

 

Selling, general and administrative

 

 

17,325

 

 

10,993

 

 

44,090

 

 

28,153

 

 

 

 

19,631

 

 

12,200

 

 

50,323

 

 

31,085

 

Income from operations of continuing operations

 

 

310

 

 

1,219

 

 

2,132

 

 

542

 

Other expense, net

 

 

(1,100)

 

 

(405)

 

 

(1,156)

 

 

(1,763)

 

Income (loss) from continuing operations, before income taxes

 

 

(790)

 

 

814

 

 

976

 

 

(1,221)

 

Income tax benefit (expense)

 

 

132

 

 

(104)

 

 

(354)

 

 

(104)

 

Income (loss) from continuing operations

 

 

(658)

 

 

710

 

 

622

 

 

(1,325)

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations of discontinued operations, net of income taxes of $75 and $672, for the three and nine months ended September 30, 2014, respectively

 

 

 —

 

 

(65)

 

 

 —

 

 

(1,280)

 

Loss from discontinued operations

 

 

 —

 

 

(65)

 

 

 —

 

 

(1,280)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

 

(658)

 

 

645

 

 

622

 

 

(2,605)

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on investments available for sale

 

 

108

 

 

(30)

 

 

(40)

 

 

75

 

Comprehensive income (loss)

 

$

(550)

 

$

615

 

$

582

 

$

(2,530)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic income (loss) per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(0.02)

 

$

0.02

 

$

0.02

 

$

(0.04)

 

Loss from discontinued operations

 

 

 —

 

 

 —

 

 

 —

 

 

(0.04)

 

Basic income (loss) per share

 

$

(0.02)

 

$

0.02

 

$

0.02

 

$

(0.08)

 

Diluted income (loss) per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(0.02)

 

$

0.02

 

$

0.02

 

$

(0.04)

 

Loss from discontinued operations

 

 

 —

 

 

 —

 

 

 —

 

 

(0.04)

 

Diluted income (loss) per share

 

$

(0.02)

 

$

0.02

 

$

0.02

 

$

(0.08)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares (basic)

 

 

34,444

 

 

34,314

 

 

34,404

 

 

34,243

 

Weighted average common shares (diluted)

 

 

34,444

 

 

34,662

 

 

34,900

 

 

34,243

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.20

 

$

 —

 

$

0.20

 

$

 —

 

 

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

 

4


 

 

OSIRIS THERAPEUTICS, INC.

CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

Unaudited
(amount 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 December 31, 2014 (restated)

 

34,345,688

 

$

35

 

$

287,525

 

$

(54)

 

$

(204,379)

 

$

83,127

 

Dividends declared

 

 —

 

 

 —

 

 

(6,890)

 

 

 —

 

 

 —

 

 

(6,890)

 

Exercise of options to purchase common stock ($.40-$16.24 per share)

 

136,065

 

 

 —

 

 

1,061

 

 

 —

 

 

 —

 

 

1,061

 

Repurchase and retirement of common stock

 

(29,113)

 

 

 —

 

 

(250)

 

 

 —

 

 

(304)

 

 

(554)

 

Share-based compensation-employees

 

 —

 

 

 —

 

 

2,381

 

 

 —

 

 

 —

 

 

2,381

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

622

 

 

622

 

Unrealized loss on investments available for sale

 

 —

 

 

 —

 

 

 —

 

 

(40)

 

 

 —

 

 

(40)

 

Windfall tax benefit from stock-based compensation

 

 —

 

 

 —

 

 

137

 

 

 —

 

 

 —

 

 

137

 

Balance at September 30, 2015

 

34,452,640

 

$

35

 

$

283,964

 

$

(94)

 

$

(204,061)

 

$

79,844

 

 

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

 

 

 

5


 

OSIRIS THERAPEUTICS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

Unaudited
(amount in thousands)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

    

2015

    

2014

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Continuing operations

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

622

 

$

(1,325)

 

Adjustments to reconcile income (loss) from continuing operations to net cash used in operations of continuing operations:

 

 

 

 

 

 

 

Net realized and unrealized loss on trading securities

 

 

1,192

 

 

2,026

 

Net realized loss (gain) on investments available for sale

 

 

356

 

 

(120)

 

Depreciation and amortization

 

 

850

 

 

685

 

Non cash share-based payments

 

 

2,381

 

 

2,184

 

Provision for bad debts

 

 

150

 

 

250

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(14,772)

 

 

(14,237)

 

Inventory

 

 

(4,658)

 

 

(6,911)

 

Other receivables

 

 

4,980

 

 

(343)

 

Prepaid expenses and other current assets

 

 

(517)

 

 

(45)

 

Accounts payable, accrued expenses, and other liabilities

 

 

165

 

 

4,434

 

Net cash used in operating activities of continuing operations

 

 

(9,251)

 

 

(13,402)

 

Discontinued operations

 

 

 

 

 

 

 

Loss from discontinued operations

 

 

 —

 

 

(1,280)

 

Adjustments to reconcile loss from discontinued operations to net cash used in operations of discontinued operations:

 

 

 

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable and other current assets

 

 

 —

 

 

91

 

Accounts payable and accrued expenses

 

 

 —

 

 

(57)

 

Net cash used in operations of discontinued operations

 

 

 —

 

 

(1,246)

 

Net cash used in operating activities

 

 

(9,251)

 

 

(14,648)

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(943)

 

 

(801)

 

Proceeds from sale of discontinued operations, net

 

 

 —

 

 

15,000

 

Proceeds from sale of trading securities

 

 

4,520

 

 

 —

 

Proceeds from sale of investments available for sale

 

 

142,438

 

 

10,354

 

Purchases of investments available for sale

 

 

(129,981)

 

 

(13,000)

 

Guaranteed payment related to trading securities

 

 

6,198

 

 

 —

 

Net cash provided by investing activities

 

 

22,232

 

 

11,553

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Principal payments on capital lease obligations

 

 

(34)

 

 

(34)

 

Restricted cash

 

 

 —

 

 

147

 

Proceeds from the exercise of options to purchase common stock

 

 

1,061

 

 

1,441

 

Common stock repurchased and retired

 

 

(554)

 

 

 —

 

Windfall benefit from stock-based compensation

 

 

137

 

 

71

 

Net cash provided by financing activities

 

 

610

 

 

1,625

 

Net increase (decrease) in cash

 

 

13,591

 

 

(1,470)

 

Cash at beginning of period

 

 

2,208

 

 

2,416

 

Cash at end of period

 

$

15,799

 

$

946

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flows information:

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

2,424

 

$

 —

 

Supplemental disclosure of non cash activities:

 

 

 

 

 

 

 

Cash dividends declared

 

 

6,890

 

 

 —

 

 

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

 

 

6


 

Table of Contents

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)

NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

 

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 cellular regenerative medicine company focused on researching, developing and marketing products in the wound, orthopaedic, 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, orthopaedic, and sports medicine 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 below, 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, 2014, 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 for the fiscal year ended December 31, 2014.

 

Correction of Prior Period Financial Statements

 

In connection with preparing the Company’s financial statements for the quarter ended September 30, 2015, the Company reviewed the timing of revenue recognition under contracts with its distributors.  As a result of this review, the Company determined to correct the revenue recognition for three contracts which will result in a decrease in product revenues of $1.8 million in the first quarter of 2015, a decrease in product revenue of $1.0 million in the second quarter, an increase in product revenues of $0.8 million in the third quarter of 2015 and a decrease in product revenues of $1.1 million in 2014. 

 

 

 

7


 

Table of Contents

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)

NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

 

Background

 

Under US GAAP, revenue is generally recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed and determinable, and collectability is probable. The Company previously recognized revenue under these three distributor contracts which was reflected in the Company’s audited financial statements in its Annual Report on Form 10-K for the year ended December 31, 2014 and its unaudited financial statements in its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2015 and June 30, 2015. 

 

Upon subsequent review in connection with the Company’s review of its third quarter 2015 financial statements, the Company determined, in consultation with its independent registered public accounting firm, that the transactions did not meet certain conditions for revenue recognition in the fourth quarter of 2014, and the first and second quarters of 2015.  Specifically to the transaction in the fourth quarter of 2014, the Company determined that the persuasive evidence of an arrangement was not met until January 2015 and the price was not fixed and determinable in the quarter that the revenues were previously recognized. As a result, the Company is required to account for the contract with this distributor under the cash basis of accounting, which means that revenues are recognized when cash receipts are actually received.  Correcting this revenue recognition error in one contract will result in an increase in product revenues of approximately $0.8 million, net of cost of sales, in the third quarter of 2015 and a decrease in product revenues of approximately $1.1 million, net of cost of sales, in 2014.  The approximate $0.3 million difference between the $0.8 million increase in product revenues for the third quarter of 2015 and the $1.1 million decrease in product revenues in 2014 will not be included as an accounts receivable as of the end of the third quarter of 2015, but will be recorded as product revenue in future periods when and if such amounts are actually received.  

 

The Company also sold product to the same distributor during the first quarter of 2015. The Company is also recognizing this sale on the cash-basis of accounting. Correcting this revenue recognition error will result in a decrease in product revenues of approximately $0.8 million, net of cost of sales, in the first quarter of 2015.  The $0.8 million of accounts receivable will not be included as an accounts receivable as of the end of the first quarter of 2015, but will be recorded as product revenue in future periods when and if such amounts are actually received.

 

Also during the first quarter of 2015, the Company recognized a $0.7 million sale, net of cost of sales, to a distributor that ordered products for sale outside of the United States. During its review of all distributor contracts undertaken during the third quarter 2015 period close process, the Company also determined that revenue recognition of this first quarter 2015 transaction is appropriate in a future period when the distributor achieves full regulatory approval in the country where they will be selling the product. This determination was made because the distributor has the right to return the product if regulatory approval is not achieved.

 

During the third quarter of 2015, the Company received true-up information from another distributor which showed the average price for product sales during the year. This distributor first sold product for the Company during the first quarter 2015. The distributor has the right to sell the product at any price, as long as it sell above a set minimum price. The impact of this price adjustment was $0.3 million revenue reduction during the first quarter 2015 and $1.0 million reduction during the second quarter 2015. The revenue adjustment was offset by a reduction in costs of goods sold, commissions and fees for that revenue. This adjustment was preliminarily recorded during the third quarter of 2015 but a determination was made to adjust previous quarters to reflect the proper impact of the adjustment to previously reported periods.

 

Materiality Assessment

 

The Company evaluated the effect of the adjustment in accordance with the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 99 (SAB 99) and SEC Staff Accounting Bulletin No. 108, "Effects of Prior Year Misstatements on Current Year Financial Statements" (SAB 108) and determined the cumulative impact of the adjustment was not material to our previously issued annual audited financial statements for the year ended

8


 

Table of Contents

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)

NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

 

December 31, 2014 and therefore, amendments of our previously filed 2014 Form 10-K is not required. We restated previously reported results for the three months ended December 31, 2014 and the year ended December 31, 2014 in this Quarterly Report on Form 10-Q for the quarter ended September 30,2015.  The accompanying condensed financial statements as of September 30, 2015 reflect the aforementioned immaterial corrections.

 

The following tables present the effects of the corrections on the Company’s financial statements for December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As Previously Reported

 

 

Q1 2014

 

Q2 2014

 

Q3 2014

 

Q4 2014

 

2014

 

Product revenues

$

10,054

 

$

13,290

 

$

17,204

 

$

19,319

 

$

59,867

 

Cost of product revenue

 

2,212

 

 

2,924

 

 

3,785

 

 

4,250

 

 

13,171

 

Gross profit

 

7,842

 

 

10,366

 

 

13,419

 

 

15,069

 

 

46,696

 

Income (loss) from continuing operations

 

(611)

 

 

(1,428)

 

 

710

 

 

1,083

 

 

(246)

 

Net income (loss)

 

(1,365)

 

 

(1,885)

 

 

645

 

 

816

 

 

(1,789)

 

Diluted income (loss) per share

$

(0.04)

 

$

(0.05)

 

$

0.02

 

$

0.02

 

$

(0.05)

 

Trade accounts receivable, net

 

 

 

 

 

 

 

 

 

 

 

 

$

24,307

 

Inventory

 

 

 

 

 

 

 

 

 

 

 

 

$

10,924

 

Total stockholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

$

83,963

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustments

 

 

Q1 2014

 

Q2 2014

 

Q3 2014

 

Q4 2014

 

2014

 

Product revenues

$

 —

 

$

 —

 

$

 —

 

$

(1,072)

 

$

(1,072)

 

Cost of product revenue

 

 —

 

 

 —

 

 

 —

 

 

(236)

 

 

(236)

 

Gross profit

 

 —

 

 

 —

 

 

 —

 

 

(836)

 

 

(836)

 

Income (loss) from continuing operations

 

 —

 

 

 —

 

 

 —

 

 

(836)

 

 

(836)

 

Net income (loss)

 

 —

 

 

 —

 

 

 —

 

 

(836)

 

 

(836)

 

Diluted income (loss) per share

$

 —

 

$

 —

 

$

 —

 

$

(0.02)

 

$

(0.02)

 

Trade accounts receivable, net

 

 

 

 

 

 

 

 

 

$

(1,072)

 

$

(1,072)

 

Inventory

 

 

 

 

 

 

 

 

 

$

236

 

$

236

 

Total stockholders' equity

 

 

 

 

 

 

 

 

 

$

(836)

 

$

(836)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restated

 

 

Q1 2014

 

Q2 2014

 

Q3 2014

 

Q4 2014

 

2014

 

Product revenues

$

10,054

 

$

13,290

 

$

17,204

 

$

18,247

 

$

58,795

 

Cost of product revenue

 

2,212

 

 

2,924

 

 

3,785

 

 

4,014

 

 

12,935

 

Gross profit

 

7,842

 

 

10,366

 

 

13,419

 

 

14,233

 

 

45,860

 

Income (loss) from continuing operations

 

(611)

 

 

(1,428)

 

 

710

 

 

247

 

 

(1,082)

 

Net income (loss)

 

(1,365)

 

 

(1,885)

 

 

645

 

 

(20)

 

 

(2,625)

 

Diluted income (loss) per share

$

(0.04)

 

$

(0.05)

 

$

0.02

 

$

(0.00)

 

$

(0.07)

 

Trade accounts receivable, net

 

 

 

 

 

 

 

 

 

 

 

 

$

23,235

 

Inventory

 

 

 

 

 

 

 

 

 

 

 

 

$

11,160

 

Total stockholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

$

83,127

 

 

 

9


 

Table of Contents

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)

NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage Change

 

 

Q1 2014

 

Q2 2014

 

Q3 2014

 

Q4 2014

 

2014

 

Product revenues

0.00

%

 

0.00

%

 

0.00

%

 

(5.55)

%

 

(1.79)

%

Cost of product revenue

0.00

%

 

0.00

%

 

0.00

%

 

(5.55)

%

 

(1.79)

%

Gross profit

0.00

%

 

0.00

%

 

0.00

%

 

(5.55)

%

 

(1.79)

%

Income (loss) from continuing operations

0.00

%

 

0.00

%

 

0.00

%

 

(77.19)

%

 

339.84

%

Net income (loss)

0.00

%

 

0.00

%

 

0.00

%

 

(102.45)

%

 

46.73

%

Diluted income (loss) per share

0.00

%

 

0.00

%

 

0.00

%

 

(120.73)

%

 

48.80

%

Trade accounts receivable, net

 

 

 

 

 

 

 

 

 

 

 

 

(4.41)

%

Inventory

 

 

 

 

 

 

 

 

 

 

 

 

2.16

%

Total stockholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

(1.00)

%

 

The following tables present the effects of the corrections on the Company’s financial statements for each quarter during 2015:

 

 

 

 

 

 

 

 

 

 

 

As Previously Reported

 

Q1 2015

 

Q2 2015

 

2015

Product revenues

$

21,003

 

$

23,688

 

$

44,691

Cost of product revenue

 

4,609

 

 

5,142

 

 

9,751

Gross profit

 

16,394

 

 

18,546

 

 

34,940

Selling, general, and administrative expenses

 

12,911

 

 

14,526

 

 

27,437

Income taxes expense

 

612

 

 

367

 

 

979

Income (loss) from continuing operations

 

1,377

 

 

1,164

 

 

2,541

Net income (loss)

 

1,377

 

 

1,164

 

 

2,541

Diluted income (loss) per share

$

0.04

 

$

0.03

 

$

0.07

Trade accounts receivable, net

$

32,022

 

$

38,598

 

 

 

Inventory

$

11,939

 

$

13,348

 

 

 

Total liabilities

$

15,128

 

$

14,185

 

 

 

Total stockholders' equity

$

86,484

 

$

88,822

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustments

 

Q1 2015

 

Q2 2015

 

2015

Product revenues

$

(1,788)

 

$

(957)

 

$

(2,745)

Cost of product revenue

 

(319)

 

 

 —

 

 

(319)

Gross profit

 

(1,469)

 

 

(957)

 

 

(2,426)

Selling, general, and administrative expenses

 

(175)

 

 

(497)

 

 

(672)

Income taxes expense

 

(402)

 

 

(91)

 

 

(493)

Income (loss) from continuing operations

 

(892)

 

 

(369)

 

 

(1,261)

Net income (loss)

 

(892)

 

 

(369)

 

 

(1,261)

Diluted income (loss) per share

$

(0.02)

 

$

(0.01)

 

$

(0.03)

Trade accounts receivable, net

$

(2,860)

 

$

(3,817)

 

 

 

Inventory

$

555

 

$

555

 

 

 

Total liabilities

$

(630)

 

$

(1,350)

 

 

 

Total stockholders' equity

$

(2,305)

 

$

(3,262)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10


 

Table of Contents

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)

NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

 

 

Restated

 

Q1 2015

 

Q2 2015

 

2015

Product revenues

$

19,215

 

$

22,731

 

$

41,946

Cost of product revenue

 

4,290

 

 

5,142

 

 

9,432

Gross profit

 

14,925

 

 

17,589

 

 

32,514

Selling, general, and administrative expenses

 

12,736

 

 

14,029

 

 

26,765

Income taxes expense

 

210

 

 

276

 

 

486

Income (loss) from continuing operations

 

485

 

 

795

 

 

1,280

Net income (loss)

 

485

 

 

795

 

 

1,280

Diluted income (loss) per share

$

0.02

 

$

0.02

 

$

0.04

Trade accounts receivable, net

$

29,162

 

$

34,781

 

 

 

Inventory

$

12,494

 

$

13,903

 

 

 

Total liabilities

$

14,498

 

$

12,835

 

 

 

Total stockholders' equity

$

84,179

 

$

85,560

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage Change

 

 

 

Q1 2015

 

Q2 2015

 

2015

 

 

Product revenues

(8.51)

%

 

(4.04)

%

 

(6.14)

%

 

Cost of product revenue

(6.92)

%

 

0.00

%

 

(3.27)

%

 

Gross profit

(8.96)

%

 

(5.16)

%

 

(6.94)

%

 

Selling, general, and administrative expenses

(1.36)

%

 

(3.42)

%

 

(2.45)

%

 

Income taxes expense

(65.69)

%

 

(24.80)

%

 

(50.36)

%

 

Income (loss) from continuing operations

(64.78)

%

 

(31.70)

%

 

(49.63)

%

 

Net income (loss)

(64.78)

%

 

(31.70)

%

 

(49.63)

%

 

Diluted income (loss) per share

(50.00)

%

 

(33.33)

%

 

(42.86)

%

 

Trade accounts receivable, net

(8.93)

%

 

(9.89)

%

 

 

 

 

Inventory

4.65

%

 

4.16

%

 

 

 

 

Total liabilities

(4.16)

%

 

(9.52)

%

 

 

 

 

Total stockholders' equity

(2.67)

%

 

(3.67)

%

 

 

 

 

 

Use of Estimates

 

The preparation of financial statements in conformity with US GAAP 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, allowance for doubtful accounts, and share-based compensation.

 

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 periods presented.

 

Cash and Cash Equivalents

 

Amounts listed as cash on our balance sheets are maintained in depository accounts at commercial banks, which include $2.2 million denominated in Australian dollars from the sale of our Mesoblast shares.  Cash and cash equivalents, which include highly liquid investments with maturities of three months or less when purchased, held in our

11


 

Table of Contents

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)

NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

 

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 (loss). All realized gains and losses on our investments available for sale are recognized in results of operations as other income (expense).

 

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 were required to hold that stock for one year from the date of receipt. Mesoblast is a public company and its stock is traded on the Australian stock exchange.

 

The Mesoblast stock was previously subject to limited price protection for the one year required holding period. To the extent the value of those shares decreased during the holding period, Mesoblast was required to pay us for the decrease in value.  This payment was 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 would also have to be held for one year during which period there was no further price protection. The price protection was accounted for as a derivative under ASC 815, Derivatives and Hedging, and, as such was recorded on the balance sheets at fair value, with changes recognized in net income. We elected to measure the Mesoblast stock at fair value with changes in fair value reflected in net income, as permitted under ASC 825-10, Financial Instruments — Fair Value Option. In December 2014, the price protection on these shares expired and we extended the restriction period to May 2015 in exchange for Mesoblast  paying us the difference between the prevailing market value of the Mesoblast stock and $15 million in cash, thereby eliminating the derivative.  As of December 31, 2014, this $15 million was shown as $10.6 million in Trading Securities and $4.4 million in Other Receivables on our Balance Sheets. In June 2015, we received $6.2 million in cash from Mesoblast for the difference between the market value of the Mesoblast stock and the $15 million agreed to be paid to us by Mesoblast. Also in June 2015, we began selling the shares of Mesoblast stock through a stockbroker in Australia. As of September 30, 2015, we sold 1,557,551 shares of Mesoblast stock and realized a loss of $13,000. As of September 30, 2015, the market value of the remaining 1,391,178 shares of Mesoblast stock held by us was $3.1 million. For the three and nine months ended September 30, 2015, we recognized an unrealized loss on the value of the Mesoblast stock of $933,000  and $1.2 million, respectively, as a component of Other Expense, Net. We expect to sell all of the Mesoblast shares by the end of this fiscal year.

 

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

12


 

Table of Contents

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)

NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

 

outstanding longer than the time specified in the respective customer's contract, typically 45-days, to be past due. As of September 30, 2015 and December 31, 2014, accounts receivable in the accompanying balance sheets is each reported net of $411,000 and $1.3 million allowance for doubtful accounts, respectively. During the nine months ended September 30, 2015, we entered into a settlement agreement with a former customer and wrote off $995,000 of accounts receivable against the allowance for doubtful accounts.  This amount was fully reserved as of December 31, 2014.

 

Trade accounts receivable balances are not collateralized. We incurred $150,000 of bad debt expense during the three months and nine months period ended September 30, 2015. We incurred $200,000 and $250,000 of bad debt expense during the three months and nine months period ended September 30, 2014, respectively.

 

Other Receivables

 

Other receivables at December 31, 2014 included the $5.0 million fee payable from Stryker, as further described below, and the $4.4 million difference between the market value of the Mesoblast ordinary shares and the $15 million agreed to be paid to us by Mesoblast as described above under “Trading Securities.” The $5.0 million fee from Stryker was received in February 2015 and the true-up payment from Mesoblast was received in June 2015.

 

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 nine months of fiscal 2015 or during fiscal year 2014.

 

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OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)

NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

 

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.  On occasion, customers purchase product and request that the Company store the purchased product in segregated freezers at the Company’s facility. In those cases, title passes to the customer and the customer accepts all risks associated with the purchased product. Customers may request this service of the Company in instances where they want to ensure that supply of product is available to them and they do not have the capability to store the product themselves in special freezers at -80 degrees Celsius. In some situations, we store consigned inventory on site in freezers at hospital or clinic facilities.  No revenue is recognized upon the placement of inventory into consignment as we retain title and maintain the inventory on our balance sheets. For these products, revenue is recognized when we receive appropriate notification that the product has been used in a 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.

 

In December 2014, we entered into an exclusive distribution agreement with a subsidiary of Stryker Corporation for the marketing and distribution of BIO4™, our viable bone matrix allograft.  Pursuant to the agreement, Stryker has been granted worldwide distribution rights to the product and any improvements, for all surgical applications. We are responsible for supply, processing, inventory management, shipments to customers, continued research and product improvement activities. The amount we recognized as revenue is based on our list prices for the allograft.  We reconcile and record the difference, if any, between the revenue previously recognized and the selling price when we receive the data from Stryker on a monthly basis.  Commissions and administrative fees paid to Stryker are accounted for as selling expenses, as Stryker is acting as outside sales and marketing agent for Osiris. We received an initial exclusivity fee of $5.0 million in the first nine months of fiscal 2015 and are entitled to receive additional fees upon any exercise by Stryker of its right to extend the initial term, whether on an exclusive or non-exclusive basis. The exclusivity fee and any extension fees subsequently received are considered to be adjustments of the selling expenses.  As such, we recognize the exclusively fee as deferred revenue, which will be amortized over the related exclusivity period in proportion to the expected fees to be paid to Stryker, as an offset to selling expenses. We amortized $236,000 and $611,000 for the three and nine months ended September 30, 2015, respectively. At December 31, 2014, we recorded a $5.0 million receivable with the offset to short-term deferred commissions of $1.7 million and long-term deferred commissions of $3.3 million.  At September 30, 2015, the short-term and long-term deferred commissions were $1.7 million and $2.7 million, respectively.

 

In October 2014, we entered into an exclusive commercial and development partnership for our cartilage product, Cartiform®, with Arthrex, Inc. The agreement provides Arthrex with exclusive commercial distribution rights to Cartiform beginning in 2015. We are responsible for product processing, continued research and product improvement activities. The responsibilities related to the design and conduct of future clinical development programs are shared between both organizations. Pursuant to the agreement, Arthrex is entitled to a certain commission on Cartiform sales. We recognize the full sales price as revenue and account for the payment to Arthrex as commission expense.

 

Research and Development Costs

 

We expense internal and external research and development (“R&D”) costs, including costs of funded R&D arrangements and the processing and production 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

14


 

Table of Contents

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)

NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

 

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 September 30, 2015 and December 31, 2014 we had no accruals for interest or penalties related to income tax matters.

 

Income (Loss) per Common Share

 

Basic income (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted income (loss) per common share adjusts basic income (loss) 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 months ended September 30, 2015 excludes all  1,573,742 of our outstanding options as of that date, as on their impact on our net loss is anti-dilutive.  Diluted income per common share for the nine months ended September 30, 2015 includes the dilutive impact of options equivalent to 495,087 shares.

 

Diluted income per common share for the three months ended September 30, 2014 includes the dilutive impact of options equivalent to 348,350 shares. Diluted loss per common share for the nine months ended September 30, 2014 excludes all 1,544,070 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

 

Comprehensive income 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 end user customers and distributors of our products. 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 nine months of fiscal 2015 and 2014, revenues from one of the distributors of our Biosurgery products, Stability Biologics, comprised approximately 11% and 9%, respectively, of our total Biosurgery product revenues. As of September 30, 2015 and December 31, 2014, receivables from this

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Table of Contents

OSIRIS THERAPEUTICS, INC.

NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (continued)

NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

 

distributor comprised 2% and 13%, respectively, of our trade receivables. As discussed under “Trade Accounts Receivable,” we have incurred $150,000 bad debt expense for the three and nine months ended September 30, 2015. We incurred $200,000 and $250,000 of bad debt expense for the three and nine months ended September 30, 2014.

 

Recent Accounting Guidance at September 30, 2015

 

In July 2015, the FASB issued Accounting Standards Update No. 2015-11, “Simplifying the Measurement of Inventory” (“ASU 2015- 11”). ASU 2015-11 requires an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using last-in, first-out (“LIFO”) or the retail inventory method. It is effective for annual reporting periods beginning after December 15, 2016. The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is currently in the process of evaluating the impact of adoption of ASU 2015-11 on its balance sheets. No other new accounting pronouncements, issued or effective during the third quarter of 2015, have had or are expected to have a significant impact on the Company’s financial statements.

 

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 million in initial consideration, and payment of up to an additional $50 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