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FCSC > SEC Filings for FCSC > Form 10-K on 1-Apr-2013All Recent SEC Filings

Show all filings for FIBROCELL SCIENCE, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-K for FIBROCELL SCIENCE, INC.


1-Apr-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our consolidated financial condition and results of operations should be read in conjunction with the consolidated financial statements and the related notes thereto included elsewhere in this Form 10-K. The matters discussed herein contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and
Section 27A of the Securities Act of 1933, as amended, which involve risks and uncertainties. All statements other than statements of historical information provided herein may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes", "anticipates", "plans", "expects" and similar expressions are intended to identify forward-looking statements. Factors that could cause actual results to differ materially from those reflected in the forward-looking statements include, but are not limited to, those discussed in "Item 1A. Risk Factors" and elsewhere in this report and the risks discussed in our other filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis, judgment, belief or expectation only as of the date hereof. We undertake no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof.

General

We are an autologous cellular therapeutic company focused on the development of innovative products for aesthetic, medical and scientific applications.

We believe that we are well positioned in regenerative medicine and cell based therapies because we have a pipeline of clinical medical programs and the first Food and Drug Administration (FDA) approved cell based product, LAVIV (United States adopted name, or USAN, is azficel-T), in aesthetics, all of which are based on the autologous fibroblast cell. Given our limited resources, both financial and manufacturing, we intend to focus on clinical programs to treat medical conditions that have an unmet need. In particular, we will focus on restrictive burn scars, vocal cord scars, acne scars and potentially rare collagen deficient conditions such as recessive dystrophic epidermolysis bullosa. We believe that there is an unmet medical need and limited competition in these markets and we can obtain greater value per fibroblast cell through significantly higher prices than currently obtained in the aesthetics market. With respect to the aesthetics market, our introductory pricing is over and we are raising LAVIV's price significantly in the second quarter of 2013.

Critical Accounting Policies

The following discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in conformity with Generally Accepted Accounting Principles (GAAP). However, certain accounting policies and estimates are particularly important to the understanding of our financial position and results of operations and require the application of significant judgment by our management or can be materially affected by changes from period to period in economic factors or conditions that are outside of the control of management. As a result they are subject to an inherent degree of uncertainty. In applying these policies, our management uses their judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on our historical operations, our future business plans and projected financial results, the terms of existing contracts, our observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. The following discusses our critical accounting policies and estimates.

Intangible Assets: Intangible assets are research and development assets related to the Company's primary study that was recognized upon emergence from bankruptcy. Amortization commenced in the first quarter of 2012 with the recognition of revenue from the sale of LAVIV.

Intangibles are tested for recoverability whenever events or changes in circumstances indicate the carrying amount may not be recoverable. The impairment test consists of a comparison of the fair value of the intangible asset to its carrying amount. If the carrying amount exceeds the fair value, an impairment loss is recognized equal in amount to that excess.

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 net operating loss (NOLs) 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.


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Warrant Liability: We account for our warrants in accordance with U.S. GAAP. The warrants are measured at fair value and liability-classified under Accounting Standards Codification (ASC) 815, Derivatives and Hedging, (ASC 815) because certain of the warrants contain "down-round protection" and therefore, do not meet the scope exception for treatment as a derivative under ASC 815. 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. Effective December 31, 2011, we utilized the Monte Carlo simulation valuation method to value the liability-classified warrants until September 30, 2012 when we concluded that the Black-Scholes option pricing model was an appropriate valuation method due to the assumption that no future financing would be expected at a price lower than the current exercise price and the majority of the warrants were converted to equity-classified warrants on October 9, 2012. The fair value is affected by changes in inputs to that model including our stock price, expected stock price volatility, the contractual term, and the risk-free interest rate. We will continue to classify the fair value of the warrants 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.

Preferred Stock and Derivative Liability: The preferred stock has been classified within the mezzanine section between liabilities and equity in its consolidated balance sheets in accordance with ASC 480, Distinguishing Liabilities from Equity (ASC 480) because, prior to the conversion of the preferred stock into common stock in October 2012, any holder of Series D or E Preferred could have required the Company to redeem all of its Series D or E Preferred in the event of a triggering event which was outside of the control of the Company.

The embedded conversion option for the Series D Preferred has been recorded as a derivative liability under ASC 815 in the Company's consolidated balance sheet as of December 31, 2011, and was re-measured on the Company's reporting dates until all the preferred stock was converted into common stock in October 2012. The fair value of the derivative liability is determined using the Black-Scholes option pricing model and is affected by changes in inputs to that model including our stock price, expected stock price volatility, the contractual term, and the risk-free interest rate.

Stock Based Compensation: We account 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 nonemployees in accordance with the accounting guidance for equity instruments that are issued to other than employees. We use 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, volatility and expected lives of the options. Expected volatility is based on historical volatility of the Company and our peer company's stock. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected lives for options granted represents the period of time that options granted are expected to be outstanding and is derived from the contractual terms of the options granted. We estimate future forfeitures of options based upon expected forfeiture rates.

Revenue Recognition: The Company recognizes revenue over the period LAVIV is shipped for injection 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.

Research and Development Expenses: Research and development costs are expensed as incurred and include salaries and benefits, costs paid to third-party contractors to perform research, conduct clinical trials, develop and manufacture drug materials and delivery devices, and a portion of facilities cost. Clinical trial costs are a significant component of research and development expenses and include costs associated with third-party contractors. Invoicing from third-party contractors for services performed can lag several months. We accrue the costs of services rendered in connection with third-party contractor activities based on our estimate of management fees, site management and monitoring costs and data management costs. Actual clinical trial costs may differ from estimated clinical trial costs and are adjusted for in the period in which they become known.


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Basis of Presentation

The following discussion should be read in conjunction with the Consolidated Financial Statements and the accompanying Notes to the Consolidated Financial Statements included in this 10-K.

Results of Operations

Comparison of Years Ending December 31, 2012 and 2011

Revenue and Cost of Sales. Revenue and cost of sales for the years ended
December 31, 2012 and 2011 were comprised of the following:



                                   Year ended                 Increase
                                  December 31,               (Decrease)
                                 2012        2011        $000s           %
                                 (in thousands)
               Total revenue   $    153      $  -       $    153           -
               Cost of sales      8,355         13         8,342        64169 %

               Gross profit    $ (8,202 )    $ (13 )    $ (8,189 )      62992 %

Revenue was $0.2 million for the year ended December 31, 2012. Revenue is booked based on the shipment of cells to the patients for injection of LAVIV. We recorded no revenue in the year ended December 31, 2011 as no injections for paying customers had been shipped.

Cost of sales was $8.4 million for the year ended December 31, 2012. Cost of sales includes the costs related to the processing of cells for LAVIV, including direct and indirect costs. The cost of sales for the year ended December 31, 2012 was comprised of $3.8 million of compensation related expenses, $3.2 million of laboratory supplies and other related expenses and $1.4 million of rent, utilities, depreciation and amortization. The principal reasons for the relatively small level of revenue as compared to the large cost of sales are:
(1) Timing - costs are incurred starting with receipt of a patient's biopsy. Revenue is not recognized until at least three months after receipt of the biopsy, when injections are made ready for shipment to the patient's physician. Injections normally occur four weeks apart so the revenue cycle can be up to nine months or more (three injection sessions); (2) Manufacturing capacity - our current manufacturing capacity is no more than twenty biopsies a week;
(3) Charging for biopsies and injections - we offered complimentary and reduced price biopsies and injections in our introductory period, and (4) Manufacturing complexity and quality control and assurance criteria. We are planning to implement a significant price increase for LAVIV on May 1, 2013. The new price will be $12,000 to the physician for the full treatment.

Selling, General and Administrative Expense. Selling, general and administrative expense for the year ended December 31, 2012 and 2011 was comprised of the following:

                                                           Year Ended                  Increase
                                                          December 31,                (Decrease)
                                                       2012          2011         $000s           %
                                                         (in thousands)
Compensation and related expense                     $  4,336      $  4,506      $   (170 )        (4 )%
External services - consulting                            914           691           223          32 %
Marketing expense                                       2,203         3,809        (1,606 )       (42 )%
License fees                                              664           803          (139 )       (17 )%
Facilities and related expense and other                4,050         2,986         1,064          36 %

Total selling, general and administrative expense    $ 12,167      $ 12,795      $   (628 )        (5 )%

Selling, general and administrative expenses decreased by approximately $0.6 million, or 5%, to $12.2 million for the year ended December 31, 2012 as compared to $12.8 million for the year ended December 31, 2011. The decrease consists primarily of a reduction in marketing expenses of $1.6 million due to significant pre-launch costs occurring in year 2011. Facilities and related expense and other increased as travel increased $0.4 million, corporate expense increased $0.2 million as a result of costs associated with the completion of multiple stock offerings during 2012, office and office related expenses $0.4 million as a result of increased headcount and more biopsy throughput.


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Research and Development Expense. Research and development expense for the year ended December 31, 2012 and 2011 was comprised of the following:

                                                 Year Ended               Increase
                                                December 31,             (Decrease)
                                              2012        2011        $000s          %
                                               (in thousands)
    Compensation and related expense         $   314     $ 2,108     $ (1,794 )      (85 )%
    External services - consulting             8,526       1,927        6,599        342 %
    Lab costs and related expense                170       1,620       (1,450 )      (90 )%
    Facilities and related expense                11       1,516       (1,505 )      (99 )%

    Total research and development expense   $ 9,021     $ 7,171     $  1,850         25 %

Research and Development expense increased $1.9 million to $9.0 million for the year ended December 31, 2012 as compared to $7.2 million for the year ended December 31, 2011. The increase is due primarily to a $6.9 million non-cash charge that was included in external services - consulting related to the recording of the fair value of 32,938,000 shares of common stock valued at $0.21 per share issued to Intrexon as consideration for the Exclusive Channel Collaboration Agreement, offset by the classification of costs associated with the production of LAVIV in the year ended December 31, 2012, recorded in cost of goods sold in the consolidated statement of operations.

Research and development costs incurred in the year ended December 31, 2012 were related to other potential indications for our Fibrocell Therapy, such as acne scars and burn scars as well as costs to develop manufacturing, cell collection and logistical process improvements. Research and development costs incurred in the year ended December 31, 2011 included costs to bring LAVIV to market.

Interest expense. Interest expense remained relatively constant at approximately $1.1 million for the years ended December 31, 2012 and 2011. Our interest expense for the years ended December 31, 2012 and 2011 is related to our 12.5% notes. The 12.5% notes were either paid or converted into common stock with the close of the October 2012 financing.

Loss on Extinguishment of Debt. On June 1, 2012, we entered into an Exchange Agreement with existing note holders pursuant to which we agreed to repay half of each Holder's 12.5% Promissory Notes due June 1, 2012 and exchange the balance of each Holder's Original Note, for (i) a new 12.5% Note with a principal amount equal to such balance, and (ii) a five-year warrant (Warrant) to purchase a number of shares of Common Stock equal to the number of shares of Common Stock underlying such Note on the date of issuance. As a result of the Exchange Agreement on June 1, 2012, we recorded a loss on extinguishment of the 12.5% notes of $4.4 million in the consolidated statement of operations due to a significant restructuring of the original debt in June 2012. The details of the loss included recording the fair value of the embedded conversion option of $1.2 million and the fair value of liability-classified warrants of $3.2 million.

Change in Revaluation of Warrant Liability. During the years ended December 31, 2012 and 2011, we recorded non-cash income of $8.7 million and non-cash expense of $4.8 million for warrant expense in our statements of operations due to an increase in the fair value of the warrant liability as a result of a change in the contractual life of the warrants. In addition, the number of shares underlying the warrants increased in 2012 due to the issuance of our Series E preferred stock, which triggered the anti-dilution protection in the warrants resulting in the lowering of the exercise price of the warrants and the increase in the number of shares underlying such warrants.

Change in Revaluation of Derivative Liability. During the years ended December 31, 2012 and 2011, we recorded non-cash expense of less than $0.1 million and $5.5 million, respectively, for derivative revaluation expense in our statements of operations due to the change in the fair value of the derivative liability related to the Series D and E preferred stock financings. In October 2012, the preferred stock was converted to common stock and the related derivative liability was reclassified to shareholders deficit as it no longer required liability classification.


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Loss from Discontinued Operations. The net loss from discontinued operations for the year ended December 31, 2012 remained relatively constant to the net loss from discontinued operations for the year ended December 31, 2011.

Deferred tax benefit. During the year ended December 31, 2012, we recorded a deferred tax benefit of $2.5 million due to the favorable impact to the computation of the valuation allowance recorded against our net deferred tax asset as a result of the reclassification of the intangible assets recognized upon emergence from bankruptcy as a finite-lived intangible asset. The reclassification freed-up the related deferred tax liability by allowing it to offset our net deferred tax asset before applying the valuation allowance.

Gain on sale of discontinued operations. On August 31, 2012 we sold all of the shares of common stock of Agera we held for approximately $1.0 million. As a result of the sale we recorded a gain of approximately $0.4 million, net of tax.

Net Loss. Net loss decreased $8.2 million to $23.2 million for the year ended December 31, 2012, as compared to $31.4 million for the year ended December 31, 2011, primarily due to the issuance of additional warrants and to the change in the fair value of the warrant liability and derivative liability related to the Series A, B, D and E preferred stock financings.

Liquidity and Capital Resources

We have experienced losses since our inception. As of December 31, 2012, we have an accumulated deficit of $72.1 million. The process of developing and commercializing our product candidates requires significant research and development work and clinical trial work, as well as significant manufacturing and process development efforts. These activities, together with our selling, general and administrative expenses, are expected to continue to result in significant operating losses for the foreseeable future.

The following table summarizes our cash flows from operating, investing and financing activities for the two years ended December 31, 2012 and 2011:

                                                Year Ended December 31,
                                                  2012             2011
                                                     (in thousands)
          Statement of Cash Flows Data:
          Total cash provided by (used in):
          Operating activities                $    (22,575 )     $ (16,837 )
          Investing activities                         509          (1,570 )
          Financing activities                      42,613          28,336

Operating Activities. Cash used in operating activities during the year ended December 31, 2012 amounted to $22.6 million, an increase of $5.7 million over the year ended December 31, 2011. The increase in our cash used in operating activities over the prior year is primarily due to an increase in net losses (adjusted for non-cash items) of $3.2 million, in addition to operating cash outflows from changes in operating assets and liabilities.

Investing Activities. Cash used in investing activities during the year ended December 31, 2012 amounted to $0.5 million due to the purchase of property and equipment for the laboratory facility in Exton, Pennsylvania.

Financing Activities. There was $42.6 million cash proceeds received from financing activities during the year ended December 31, 2012, as compared to $28.3 million received from financing activities during the year ended December 31, 2011. During the years ended December 31, 2012 and 2011, we raised cash of $52.1 million and $30.4 million, respectively, from the issuance of common stock, preferred stock and warrants, offset primarily by principal debt payments of $4.8 and $1.3 million in 2012 and 2011, respectively, and dividend payments of $0.5 million and $0.6 million in 2012 and 2011, respectively. Of the $52.1 million received in 2012, we received $43.0 million in gross proceeds from the October 2012 offering with $2.0 million in subscribed proceeds still outstanding from a single foreign investor. The remaining $9.1 million was received during May, June and July 2012 when we sold to accredited investors in a private placement Series E Convertible Preferred Stock.


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Working Capital

As of December 31, 2012, we had cash and cash equivalents of $31.3 million and working capital of $31.6 million. We expect to have sufficient cash to operate for at least the next twelve months. However, we may require additional financing to complete the burn scars and vocal scars clinical trials we intend to commence in 2013. In addition, we expect we will require additional financing prior to our business achieving significant net cash from operations. We would likely raise such additional capital through the issuance of our equity or equity-linked securities, which may result in dilution to our investors, or by entering into strategic partnerships. Our ability to raise additional capital is dependent on, among other things, the state of the financial markets at the time of any proposed offering. To secure funding through strategic partnerships, it may be necessary to partner one or more of our technologies at an earlier stage of development, which could cause us to share a greater portion of the potential future economic value of those programs with our partners. There is no assurance that additional funding, through any of the aforementioned means, will be available on acceptable terms, or at all. If adequate capital cannot be obtained on a timely basis and on satisfactory terms, our operations could be materially negatively impacted

Factors Affecting Our Capital Resources

Inflation did not have a significant impact on our results during the year ended December 31, 2012 or 2011.

Off-Balance Sheet Transactions

We do not engage in material off-balance sheet transactions.

Contractual Obligations

The following table summarizes our contractual obligations as of December 31, 2012 (in thousands):

                                                                  Payments due by period
                                                                      2014 and       2016 and        2018 and
Contractual Obligations                      Total        2013          2015           2017         thereafter
License fee obligations(1)                  $  1,395     $   520     $      795     $       40     $         40
Operating lease obligations(2)              $ 13,321     $ 1,070     $    2,292     $    2,508     $      7,451

Total                                       $ 14,716     $ 1,590     $    3,087     $    2,548     $      7,491

(1) Obligations for license agreement with the University of California, Los Angeles (UCLA) and sponsored research agreement with the Massachusetts Institute of Technology (MIT). The amounts in the table assume the foregoing agreements are continued through their respective terms. The agreements may be terminated at the option at either party. In such event, our obligation would be limited to costs through the date of such termination.

(2) Operating lease obligations are stated based on renewed lease agreement for the office, warehouse and laboratory facilities executed in February 2012.

Historically we have entered into agreements with academic medical institutions and contract research organizations to perform research and development activities and with clinical sites for the treatment of patients under clinical protocols. Such contracts expire at various dates and have differing renewal and expiration clauses.

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