Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2015

The accompanying Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and include the accounts of Fibrocell and its wholly owned subsidiaries. The accompanying Consolidated Financial Statements should be read in conjunction with the Notes to the Consolidated Financial Statements ("Notes"). All intercompany accounts and transactions have been eliminated in consolidation. The Company's foreign operations are immaterial and it has no unrealized gains or losses from the sale of investments. As a result, it does not have any items that would be classified as other comprehensive income in such a statement.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, equity, revenues and expenses, and related disclosure of contingencies in the accompanying Consolidated Financial Statements and Notes. In addition, management’s assessment of the Company’s ability to continue as a going concern involves the estimation of the amount and timing of future cash inflows and outflows. On an ongoing basis, the Company evaluates its estimates, judgments and methodologies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable. Actual results may differ materially from those estimates.

Segment Information

The Company has determined that it operates in only one segment, as it only reports operational results on an aggregate basis to its chief operating decision maker. Additionally, all of the Company's revenues are derived from within, research development activities occur in, and assets are located in, the United States.

Cash and Cash Equivalents

The Company considers highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.

Concentration of Credit Risk

As of December 31, 2015, the Company maintains its operating cash with one major U.S. domestic bank and the remainder of its cash and cash equivalents as a money market fund with one major global bank. Federal insurance coverage on operating cash amounted to $250,000 per depositor at each financial institution, and the Company’s non-interest bearing cash balances may exceed federally insured limits. The terms of these deposits are on demand to minimize risk. The Company has not incurred losses related to these deposits.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded at the invoiced amount, net of related cash discounts, and do not bear interest. The Company does not have any off-balance sheet exposure related to its customers. The Company maintains an allowance for doubtful accounts related to its accounts receivable that have been deemed to have a high risk of collectability. Management reviews its accounts receivable on a monthly basis to determine if any receivables may be uncollectible. Management analyzes historical collection trends and changes in its customer payment patterns, customer concentration and creditworthiness when evaluating the adequacy of its allowance for doubtful accounts. In its overall allowance for doubtful accounts, the Company includes any receivable balances that are determined to be uncollectible. Based on the information available, management believes the allowance for doubtful accounts is adequate; however, actual write-offs might exceed the recorded allowance.

Inventory

Inventories are determined at the lower of cost or market value, with cost determined under specific identification and on the first-in-first-out method. Inventories consist of raw materials and work-in-process. On a periodic basis, we analyze our inventory levels and reserve for inventory that is expected to expire prior to being sold, inventory that has a cost basis in excess of its expected net realizable value, inventory in excess of expected sales requirements, or inventory that fails to meet commercial sale specifications. Expired inventory is disposed of and the related costs are written off to the reserve for inventory obsolescence or charged against cost of product sales. Any remaining deferred revenue associated with such inventory is recognized at that time as the Company has fulfilled its obligations to the customer. The Company has determined that no inventory reserve was necessary at December 31, 2015 or December 31, 2014.

Property and Equipment

Property and equipment is carried at acquisition cost less accumulated depreciation. Depreciation is computed on a straight-line basis over the estimated useful life of the asset. The cost of repairs and maintenance is charged to expense as incurred. In the first quarter of 2014, the Company adjusted its useful lives to more accurately reflect the expected consumption of the economic benefit of these assets as noted in the following table:



Property and equipment category		Useful life
Laboratory equipment		6 years
Computer equipment and software		3 years
Furniture and fixtures		10 years
Leasehold improvements		Lesser of remaining lease term or life of asset

In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) ASC Topic 250, Accounting Changes and Error Corrections, the Company accounted for this change in useful lives as a change in estimate, with prospective application only. The impact of this change in estimate on depreciation expense was immaterial to the results in the Consolidated Statements of Operations.

Intangible Assets

Intangible assets are research and development assets related to the Company’s primary study on azficel-T that were capitalized on the balance sheet upon emergence from bankruptcy. The portion of the reorganization value which was attributed to identifiable intangible assets was $6.3 million. Azficel-T has three current or target indications: the Company's FDA-approved product LAVIV and a clinical development program for azficel-T for the treatment of vocal cord scarring resulting in chronic or severe dysphonia. Effective January 1, 2012, the Company launched LAVIV and as a result, the research and development intangible assets related to the Company’s primary study were considered to be finite-lived intangible assets and began amortizing over 12 years, the estimated useful life of the assets which is analogous with the exclusivity period granted to the Company under the BLA. For each of the years ended December 31, 2015, 2014 and 2013, amortization expense was approximately $0.6 million. The Company expects to amortize approximately $0.6 million for each of the next five years.

Finite-lived intangible assets are recorded at cost, net of accumulated amortization and, if applicable, impairment charges. Amortization of finite-lived intangible assets is provided over their estimated useful lives on a straight-line basis. The Company reviews the estimated remaining useful life of its intangible assets on an annual basis with any changes, if applicable, accounted for prospectively. In accordance with ASC 360-10-35, Impairment or Disposal of Long-Lived Assets, the Company reviews its finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. There was no impairment expense recognized for the years ended December 31, 2015, 2014 or 2013. Clinical trials and the development of biopharmaceutical products is a lengthy and complex process with significant uncertainty and risk. If development programs for azficel-T are not successful and the Company does not obtain regulatory approval, or there is a lack of commercial viability of the product(s), the Company's intangible assets may become impaired.

Warrant Liability

The Company accounts for stock warrants as either equity instruments or derivative liabilities depending on the specific terms of the warrant agreement. Stock warrants are accounted for as a derivative in accordance with ASC 815, Derivatives and Hedging (“ASC 815”) if the stock warrants contain “down-round protection” or other terms that could potentially require “net cash settlement” and therefore, do not meet the scope exception for treatment as a derivative. Since “down-round protection” is not an input into the calculation of the fair value of the warrants, the warrants cannot be considered indexed to the Company’s own stock which is a requirement for the scope exception as outlined under ASC 815. Warrant instruments that could potentially require “net cash settlement” in the absence of express language precluding such settlement and those which include “down-round provisions” are initially classified as derivative liabilities at their estimated fair values, regardless of the likelihood that such instruments will ever be settled in cash. The Company will continue to classify the fair value of the warrants that contain “down-round protection” and “net cash settlement” as a liability until the warrants are exercised, expire or are amended in a way that would no longer require these warrants to be classified as a liability.

Revenue Recognition

Revenue from Product Sales. In June 2011, the FDA approved the Company's BLA for LAVIV for the improvement of the appearance of moderate to severe nasolabial fold wrinkles in adults. The Company recognizes revenue from product sales in accordance with ASC 605, Revenue Recognition (“ASC 605”). In general, ASC 605 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists, (2) delivery has occurred or services rendered, (3) the fee is fixed and determinable and (4) collectability is reasonably assured.

In general, prepayments are received at three different stages of the treatment: (1) the biopsy stage, (2) the cell harvest stage, and (3) the injection stage. As one full course of LAVIV therapy includes three series of injections, prepayments are deferred and revenue is recognized on a prorata basis as each of the three series of injections is shipped to the physician. Currently, the Company no longer actively markets or promotes LAVIV to physicians or patients; however, prescriptions are still being accepted and filled.

Collaboration Revenue. The Company follows ASC 605-25, Revenue Recognition – Multiple-Element Arrangements ("ASC 605-25") and ASC 808, Collaborative Arrangements, if applicable, to determine the recognition of revenue under its collaborative research, development and commercialization agreements. The terms of these agreements generally contain multiple elements, or deliverables, which may include (i) grants of licenses, or options to obtain licenses, to our intellectual property, (ii) research and development services, (iii) clinical and commercial manufacturing, and/or (iv) participation on joint research and/or joint development committees. The payments the Company may receive under these arrangements typically include one or more of the following: non-refundable, up-front license fees; funding of research and/or development efforts including proof-of-concept studies and product development; amounts due upon the achievement of specified objectives or milestones such as obtaining patents, trademarks and certain regulatory approvals, and achievement of commercialization of products; and/or royalties on future product sales.

Each of the required deliverables under such an arrangement are evaluated, in accordance with ASC 605-25, to determine whether it qualifies as a separate unit of accounting based on whether the deliverable has “stand-alone value” to the customer. The arrangement’s consideration that is fixed or determinable is then allocated to each separate unit of accounting based on the relative selling price of each deliverable. In general, the consideration allocated to each unit of accounting is recognized as the related goods or services are delivered, limited to the consideration that is not contingent upon future deliverables. Collaboration revenue is recognized on a gross basis, in accordance with the criteria set forth in ASC 605-45, Revenue Recognition: Principal Agent Considerations.

Collaboration revenue for the years ended December 31, 2015 and 2014 is related to a research and development agreement that the Company has with a third party to investigate potential new non-pharmaceutical applications for the Company's conditioned fibroblast media technology. Revenue recognized to date from this collaboration relates to an upfront license fee that is being amortized over the estimated contract period and a proof-of-concept study which was completed as of December 31, 2015. Deferred revenue related to this collaboration as of December 31, 2015 includes the unamortized balance of the upfront license fee. There was no such collaboration revenue for the year ended December 31, 2013.

The Company will recognize future milestone payments when earned provided that (1) the milestone event is substantive in that it can only be achieved based in whole or in part on either the Company’s performance or on the occurrence of a specific outcome resulting from the Company’s performance and its achievability was not reasonably assured at the inception of the agreement; (2) the Company does not have ongoing performance obligations related to the achievement of the milestone; and (3) it would result in the receipt of additional payments. A milestone payment is considered substantive if all of the following conditions are met: (a) the milestone payment is non-refundable; (b) achievement of the milestone was not reasonably assured at the inception of the arrangement; (c) substantive effort is involved to achieve the milestone; and (d) the amount of the milestone payment appears reasonable in relation to the effort expended, the other milestones in the arrangement and the related risk associated with the achievement of the milestone.

Cost of Revenue

Cost of revenue includes expenses related to revenue from product sales and collaboration revenue.

Cost of Product Sales. Costs include the expense to manufacture LAVIV, including direct and indirect costs. Beginning in 2014, cost of product sales is comprised of allocated costs associated with the Company’s manufacturing, facility, quality control, and quality assurance operations as well as overhead costs. The principal reason for the relatively small level of revenue as compared to the cost of product sales is that in late 2013 the Company shifted its strategic focus away from the aesthetic market (LAVIV) and towards developing treatments for diseases affecting the skin, connective tissue and joints. Costs incurred for shipping and handling during the biopsy stage (to/from physicians) are included in cost of product sales. Costs related to shipping and handling of injections (to physicians) are included in selling, general and administrative expenses.

Cost of Collaboration Revenue. Costs directly related to deliverables in a revenue-generating collaboration are

charged to cost of collaboration revenue as incurred.

Research and Development Expenses

Research and development costs are expensed as incurred and include employee salaries and benefits, costs incurred with third party contractors to perform research, conduct clinical trials, develop and manufacture drug materials and delivery devices, and a portion of facilities costs. Research and development expenses also include costs to manufacture product for clinical trial use and to develop manufacturing, cell collection and logistical process improvements.

Clinical trial costs are a significant component of research and development expenses, often with third party service providers. Invoicing from third party contractors for services performed can lag several months. The Company accrues the costs of services rendered in connection with third party contractor activities based on its estimate of management fees, site management and monitoring costs and data management costs incurred in a given period.

Stock-Based Compensation

The Company follows ASC 718, Compensation – Stock Compensation, or ASC 505-50, Equity – Equity Based Payments to Non-Employees, where applicable. The Company accounts for stock-based awards to employees using the fair value based method to determine compensation for all arrangements where shares of stock or equity instruments are issued for compensation. In addition, the Company accounts for stock-based compensation to non-employees in accordance with the accounting guidance for equity instruments that are issued to other than employees. The Company uses a Black-Scholes option-pricing model to determine the fair value of each option grant as of the date of grant for expense incurred. The Black-Scholes model requires inputs for risk-free interest rate, dividend yield, expected stock price volatility and expected life of the options. The value of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service period.

Income Taxes

An asset and liability approach is used for financial accounting and reporting for income taxes. Deferred income taxes arise from temporary differences between income tax and financial reporting and principally relate to recognition of revenue and expenses in different periods for financial and tax accounting purposes and are measured using currently enacted tax rates and laws. In addition, a deferred tax asset can be generated by a net operating loss carryover. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized.

In the event the Company is charged interest or penalties related to income tax matters, the Company would record such interest as interest expense and would record such penalties as other expense in the Consolidated Statements of Operations. No such charges have been incurred by the Company. For each of the years ended December 31, 2015, 2014 and 2013, the Company had no uncertain tax positions.

Loss Per Share Data

oss Per Share Data

Basic loss per share is computed by dividing net loss for the period by the weighted average number of shares of common stock outstanding during that period. The diluted loss per share calculation gives effect to dilutive stock options, warrants and other potentially dilutive common stock equivalents outstanding during the period. Diluted loss per share is based on the treasury stock method and includes the effect from the potential issuance of common stock, such as shares issuable pursuant to the exercise of stock options and warrants, assuming the exercise of all "in-the-money" stock options and warrants based on the average market price during the period. Common stock equivalents have been excluded where their inclusion would be anti-dilutive.

Fair Value of Financial Instruments

The carrying values of certain of the Company’s financial instruments, including cash and cash equivalents and accounts payable, approximate fair value due to their short maturities. Warrant liability is also recorded at fair value. The fair values of the Company’s long term obligations are based on assumptions concerning the amount and timing of estimated future cash flows and assume discount rates reflecting varying degrees of risk. The carrying values of the Company’s long term obligations approximate their fair values.

Recently Issued Accounting Pronouncements

In April 2015, the FASB issued ASU 2015-05, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement ("ASU 2015-05"), which provides additional guidance to customers about whether a cloud computing arrangement includes a software license. Under ASU 2015-05, if a software cloud computing arrangement contains a software license, customers should account for the license element of the arrangement in a manner consistent with the acquisition of other software licenses. If the arrangement does not contain a software license, customers should account for the arrangement as a service contract. ASU 2015-05 also removes the requirement to analogize to ASC 840-10, Leases, to determine the asset acquired in a software licensing arrangement. An entity can elect to adopt the amendments either prospectively to all arrangements entered into or materially modified after the effective date or retrospectively. The guidance is effective for public companies with annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. Earlier application is permitted. The Company does not believe the impact of adoption of ASU 2015-05 to be material to its Consolidated Financial Statements.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which requires an entity to measure in scope inventory at the lower of cost and net realizable value rather than at the lower of cost or market, where market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. The amendments do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. The guidance is effective for public companies with annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and should be applied prospectively. Earlier application is permitted. The Company does not believe the impact of adoption of ASU 2015-11 to be material to its Consolidated Financial Statements.

In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers by one year the effective date of ASU 2014-09, Revenue from Contracts with Customers. The guidance is effective for public companies with annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Earlier application is permitted. The Company is currently evaluating the effects of the adoption of ASU 2014-09 deferred by this update on its Consolidated Financial Statements but does not believe the impact to be material.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet (including by lessees for those leases classified as operating leases under previous GAAP) and disclosing key information about leasing arrangements. The guidance is effective for public companies with annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Earlier application is permitted. The Company believes the proposed ASU would increase its total assets and total liabilities on its Consolidated Balance Sheet as a result of capitalizing the current operating lease, as amended, for the Exton, PA facility. The Company does not anticipate any other impacts to its Consolidated Financial Statements.

Management does not believe that any other recently issued, but not yet effective, accounting pronouncements, if adopted, are applicable to the Company or would have a material impact on its Consolidated Financial Statements.

Recently Adopted Accounting Pronouncements

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes ("ASU 2015-17"), which simplifies the reporting requirements of deferred taxes by requiring all organizations to classify all deferred tax assets and liabilities, along with any related valuation allowance, as noncurrent. The guidance is effective for public companies with annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is permitted. The Company has elected to early adopt ASU 2015-17 as of December 31, 2015, with retrospective application. The adoption of this ASU had no impact on the Company's Consolidated Financial Statements in the current year or previously reported periods because of the Company's full valuation allowance.