Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
ICEL > SEC Filings for ICEL > Form 10-K/A on 11-Mar-2014All Recent SEC Filings

Show all filings for CELLULAR DYNAMICS INTERNATIONAL, INC.

Form 10-K/A for CELLULAR DYNAMICS INTERNATIONAL, INC.


11-Mar-2014

Annual Report


Item 7. Management's discussion and analysis of financial condition and results
of operations
You should read the following discussion of our financial condition and results of operations in conjunction with the financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in "Item 1A. Risk factors." This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this Annual Report on Form 10-K other than statements of historical fact, including statements regarding our future results of operations and financial position, our business strategy and plans, and our objectives for future operations, are forward-looking statements. The words "believe," "may," "will", "estimate," "continue," "intend," "expect" and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those referenced in Part I Item 1A "Risk factors" in this Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this Annual Report on Form 10-K may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.
Unless expressly indicated or the context requires otherwise, the words "Cellular Dynamics," "CDI," "we," the "Company," "us" and "our" in this document refer to Cellular Dynamics International, Inc.

Overview
We develop and manufacture fully functioning human cells in industrial quantities to precise specifications. Our proprietary iCell Operating System (iCell O/S) includes true human cells in multiple cell types (iCell products), human induced pluripotent stem cells (iPSCs) and custom iPSCs and iCell products (MyCell products). Our iCell O/S products provide standardized, easy-to-use, cost-effective access to the human cell, the smallest fully functioning operating unit of human biology. Customers use our iCell O/S products, among other purposes, for drug discovery and screening; to test the safety and efficacy of their small molecule and biologic drug candidates; for stem cell banking; and in researching and developing cellular therapeutics.
We conduct our business through one operating segment and as a consequence our discussion below focuses on the the Company as a whole.
We market our products for use in three principal end use markets: 1) in vitro research and development; 2) stem cell banking; and 3) in vivo cellular therapeutics research and development. Our customers include biopharmaceutical companies, government research institutions, academic and nonprofit


Table of Contents

research institutions, contract research organizations and stem cell banks. In 2012, we sold our products to 18 of the top 20 biopharmaceutical companies (based on worldwide revenue). We now believe that worldwide research and development spending is a more relevant metric of the sales potential to us of a given biopharmaceutical company. In 2013 we sold to 19 of the top 20 biopharmacuetical companies as ranked by their worldwide research and development spending.
In 2013 our Total revenues were $11.9 million, an increase of 81% over 2012. Product sales increased 54% from $5.2 million in 2012 to $8.0 million for 2013. Collaborations, partnerships and other revenues increased 177% from $1.4 million in 2012 to $3.9 million in 2013. This growth has been driven by both increases in the number of our customers and increases in revenue from our top customers. At December 31, 2013, our total backlog of revenue had grown to approximately $27.6 million with $8.3 million of that amount expected to be recognized in 2014. Backlog includes $15.8 million related to the CIRM agreement and $6.3 million related to our subcontractor agreement with Coriell.
A large portion of our backlog is subject to contractual arrangements which require our performance of certain agreed upon experimental work plans, the achievement of certain research milestones and/or other factors. In addition, certain of these contractual arrangements are terminable at our customers' discretion. If our customers terminate these contractual arrangements or we are unable to perform or experience delays in performing our obligations, then the recognition of this backlog as revenue may be delayed or may not occur. We hope to grow revenue in a number of ways. First, we expect to sell our existing products to new customers and in greater volume to current customers. Many of our customers have initially purchased small quantities of our products in order to perform functional product and technical qualification experiments and to perform high throughput assay development. Subsequent to these initial purchases, a number of our customers have then purchased in higher volumes. Secondly, as discussed elsewhere in this filing, we expect to continue to develop new cell types and applications. We expect that we will be able to sell these products to new and existing customers. Lastly, we may be able to enter new markets with our products.
During 2011, 60 customers purchased from us. In 2012 that number grew to 128 and in 2013 increased to 150. Average revenue for our top 10 customers increased from $179,000 in fiscal year ended 2011 to $445,000 in the fiscal year ended 2012 and to $830,000 for the fiscal year ended December 31, 2013. Gross margins on product sales improved from 60% in 2012 to 71% in 2013. We anticipate that the gross margin from product sales in upcoming periods will likely be lower than that achieved throughout 2013. We expect that this decline will be driven principally by new product introductions and the growth of our MyCell product line.
We intend to achieve profitability as a result of ongoing sales growth in excess of the growth in our operating expenses. Considered in the aggregate, Total costs and expenses (excluding Cost of product sales) grew 27% from 2012 to 2013. This growth was principally due to both a growth in Sales and marketing expenses to support our increases in revenue combined with increases and to growth in our General and administrative expenses incurred as of and since the IPO. However, the growth rate of our Total costs and expenses continues to remain favorable when compared to our 81% growth in Total revenues over the same period. In 2014 we intend to continue our strategy of developing new cell types and commercializing the iCell O/S for sale in our three principal end use markets. In 2014 we will also begin to recognize significant revenue from the previously announced iPSC banking contract with the CIRM and the related contract with Coriell. As a consequence, we believe our sales into the stem cell banking market will become an increasing percentage of Total revenues. We expect revenue from this contract to be captioned as


Table of Contents

Collaborations, partnerships and other revenues and the expenses incurred to perform the contract to be captioned principally as Research and development expenses.
In 2014, among other sources of revenue growth, we expect to generate revenue from our iCell Hepatoycte product and other iCell products currently in development. We expect to continue captioning revenue from the sale of iCell Heptaocytes as Collaborations, partnerships and other revenues until such time as the manufacture of this product meets our criteria for caption as Product sales. Until such time the costs incurred to produce iCell Hepatocytes will continue to be included in Research and development expense.
As a consequence of the aforementioned classification of the CIRM contract and of iCell Hepatocytes sales, we anticipate that 2014 Research and development expenses will be substantially higher than in 2013. However, we do not anticipate significantly expanding Research and development expenses that are devoted to new product development beyond that incurred in prior periods. We expect Sales and marketing expenses to continue growing to support our planned growth in revenue. The amount of General and administrative expenses incurred in the fourth quarter includes most of the running costs we will incur now that we are a public company. General and administrative expenses will grow by the non-cash expenses associated with expected grants of additional incentive stock options as well as additional hiring in support of the business.
On July 30, 2013, we closed our IPO of 3,846,000 shares of our common stock. The public offering price of the shares sold in the offering was $12.00 per share. The total gross proceeds from the offering were $46.2 million. After deducting underwriting discounts and commissions and offering expenses payable by us, we received aggregate net proceeds of approximately $40.8 million. As of December 31, 2013, we had $62.0 million of cash and cash equivalents.
We believe our cash balance is sufficient to meet the operating needs of the company in 2014. In addition to incurring operating losses we also expect to make investments in capital equipment and intellectual property. We do not believe these costs will be significantly greater than those incurred in 2013. Capital expenditures were incurred in the later part of 2013 to equip our new facility in Novato, CA which we have established to perform on the CIRM contract. Capital expenditures will be incurred throughout 2014 to finish equipping that facility. In addition, we will incur capital expenditures to equip additional production labs in Madison, WI and for the general operation of the business.


Table of Contents

Results of operations

                                                          Year ended December 31,
(Dollars in thousands)                                 2011          2012          2013

Statements of operations:
Revenues:
Product sales                                     $   1,460     $   5,178     $   7,998
Collaborations, partnerships and other revenues       1,137         1,404         3,886
Total revenues                                        2,597         6,582        11,884

Costs and expenses:
Cost of product sales                                   727         2,089         2,302
Research and development                             13,660        14,301        16,622
Sales and marketing                                   3,031         4,398         6,516
General and administrative                            6,482         8,024        10,707
Total costs and expenses                             23,900        28,812        36,147

Loss from operations                                (21,303 )     (22,230 )     (24,263 )

Other (expense) income:
Interest expense                                        (44 )         (34 )        (716 )
Other income                                              3             -            21
Total other expense                                     (41 )         (34 )        (695 )

Net loss                                          $ (21,344 )   $ (22,264 )   $ (24,958 )


Table of Contents

Comparison of the years ended December 31, 2011, 2012 and 2013 Product sales:
Product sales represent the sale of iCell O/S products for which there is a well-defined manufacturing and quality control protocol. Products so characterized are produced within our manufacturing organization and are subject to a rigorous set of quality control metrics and other industrial controls. Revenue from the sale of media and reprogramming kits are also captioned as Product sales but are manufactured to our specification by a third party. Our products are typically priced by the unit, and revenue is recognized upon delivery of the units.

                        Year ended                                          Year ended
                       December 31,                                        December 31,
(Dollars in                                  $ Change      % Change                              $ Change      % Change
thousands)           2011        2012                                    2012        2013
Product sales      $ 1,460     $ 5,178     $    3,718         255 %    $ 5,178     $ 7,998     $    2,820          54 %
Percentage of           56 %        79 %                                    79 %        67 %
total revenue

The following table provides product sales revenue by product:

(Dollars in thousands)         Year ended
                              December 31,
                        2011      2012      2013
iCell Cardiomyocytes    $1,350    $2,610    $4,787
iCell Neurons              45     2,256     2,428
MyCell                      -         -       222
Other                      65       312       561
Total                   $1,460    $5,178    $7,998

The growth in Product sales for both 2012 and 2013 is primarily attributable to an increase in unit volume sales of our iCell Cardiomyocytes and, in 2012, to our iCell Neurons. In addition, our weighted average prices for iCell products increased 5% from 2011 to 2012 and 8% from 2012 to 2013.
During 2013, we recorded the sales of MyCell products within Product sales, reflecting our judgment that delivery of this product had met the criteria for such reporting.

Collaborations, partnerships and other revenues:
Collaborations, partnerships and other revenues consist of fees earned under early access and technology license arrangements, services rendered under experimental work plans, grants and milestone payments received under license and collaboration agreements. Many of these agreements are characterized as multiple-element arrangements. Under this caption, we also report revenue associated with the sale of differentiated cells, such as iCell Hepatocytes, which have not yet met our requirements for characterization as product sales.

                        Year ended                                          Year ended
                       December 31,                                        December 31,
(Dollars in                                 $ Change      % Change                               $ Change      % Change
thousands)           2011        2012                                    2012        2013
Collaborations,    $ 1,137     $ 1,404     $     267          23 %     $ 1,404     $ 3,886     $    2,482         177 %
partnerships and
other
Percentage of           44 %        21 %                                    21 %        33 %
total revenue


Table of Contents

The amount and nature of arrangements in Collaborations, partnerships and other revenues has varied from year to year with the 2013 increases driven primarily by activity on the research components of our center of excellence agreements with Eli Lilly and Company (Lilly) and AstraZeneca UK Limited (AstraZeneca). Neither agreement resulted in revenue until the latter half of 2012. In 2012 and 2013, we recognized $318,000 and $1.3 million related to custom cell development and joint steering committee activity under the Lilly agreement, including $25,000 and $100,000, respectively, of milestones achieved in those years. Pre-commercial cell types sold to Lilly under the center of excellence amounted to $329,000 in 2013. As of December 2013 $813,000 remained for the Lilly custom cell development and joint steering committee activity that is scheduled to be completed in 2014. In addition, there are $375,000 of milestones that could be achieved during 2014.
In 2013, Collaborations, partnerships and other revenues also included $595,000 of revenue from the research component of the AstraZeneca agreement. In 2012, revenue from the AstraZenenca agreement did not begin until the final quarter and had only $10,000 included in Collaborations, partnerships and other revenues. As of December 31, 2013 we had completed all research work of the AstraZeneca agreement.
Our revenues also included $400,000 in 2012 and $533,000 in 2013 relating to a grant awarded by the National Institute of Health - National Heart Lung and Blood Institute (NHLBI) to the Medical College of Wisconsin (MCOW). This grant involves the derivation and use of iPSC-derived cardiomyocytes. The first two phases of this grant were completed as of June 2013. The third phase, representing approximately $2.7 million of the grant, began in the fourth quarter of 2013 and will continue until the end of the project period in 2016. On November 4, 2013, we announced the receipt of the Notice of Grant Award (NGA) from CIRM. Receipt of the NGA signified the entry into a definitive agreement with CIRM and the initiation of funding for the $16 million project. In the final months of 2013, we recorded $182,000 of revenue related to this award. In 2011, revenue included a $216,000 grant from the Wisconsin Department of Commerce (the WDOC) (currently known as the Wisconsin Economic Development Corporation (the WEDC)). The grant was awarded by the WEDC as a 20% match to the 2010 federal grant we received under the Qualifying Therapeutic Discovery Project program created as part of the Affordable Care Act. The WEDC made the grant under two agreements, (1) an agreement entered into in 2005 between Cellular Dynamics International, Inc., our predecessor by merger, and the WDOC and (2) an agreement entered into in 2006 between Stem Cell Products, Inc., our predecessor by merger, and the WDOC. We are not subject to any funding conditions and do not have any continuing obligations to the WEDC under these grants and the WEDC did not receive any intellectual property rights under these grant agreements. Otherwise, 2011 revenue included smaller arrangements for early access to cell types under development and custom cell development. In 2012 we also received a $40,000 match from WEDC related to the MCOW revenues mentioned above.

Cost of product sales:
Cost of product sales includes: (i) salaries and related personnel expenses of production related activity, including stock-based compensation; (ii) material, royalties and shipping and handling; and (iii) infrastructure and overhead. Cost of product sales also includes costs associated with quality assurance, scrap and production variances. Cost of product sales includes the costs associated with the sale of products which we report as Product sales. The costs associated with revenue from Collaborations, partnerships and other revenues are included in Research and development expenses.


Table of Contents

We believe that the difference between Product sales and Cost of product sales (gross margin from product sales) is an important measurement of our performance. Our gross margin from product sales is likely to vary from period to period because of changes in product costs, product pricing and product mix. We expect product costs to fluctuate due to: (i) reductions in material costs as products are produced in higher volume; (ii) cost variances in material, labor and overhead attributable to the natural volatility of yield in biological manufacturing processes; (iii) systematic improvements in yield from increased scale and improving methods within our manufacturing processes; and (iv) technical innovation leading to product obsolescence. Gross margin may also be impacted by pricing pressure from competitors entering our market and by sales and promotion activities. Lastly, our product mix in each reporting period will impact our product gross margin. Our costs and pricing currently varies across our product portfolio. And, in addition, our future product portfolio will include new products, the costs and pricing for which are unknown.

                        Year ended                                         Year ended
                       December 31,                                       December 31,
(Dollars in                                 $ Change      % Change                             $ Change      % Change
thousands)           2011       2012                                    2012        2013
Cost of product    $  727     $ 2,089     $    1,362         187 %    $ 2,089     $ 2,302     $     213          10 %
sales
Gross margin of        50 %        60 %                                    60 %        71 %
product sales

The 71% gross margin from product sales in the current year reflects reductions in both the material and overhead costs as well as reductions in royalty costs for the currently marketed version of iCell Cardiomyocytes. In addition, the increases in average sales price, discussed above, contributed to the higher margin. The MyCell products introduced during 2013 had, and may continue to have, lower gross margins than our current iCell products.
In the fourth quarter of 2012 we wrote off $413,000 for specific units no longer held for sale. The write-off primarily related to cells manufactured in 2010 and 2011. During that time we manufactured iCell Cardiomyocytes using two alternative methods, each of which produced cells in full conformity with our quality control release specifications. However, due to emerging production efficiencies and customer preference we elected to standardize manufacturing on one method. In the fourth quarter of 2012 we determined that we no longer expected to sell those cells manufactured under the discontinued method and wrote off their value.
Royalty expense related to Product sales totaled $349,000 in 2011, $683,000 in 2012 and $685,000 in 2013 or 24%, 13% and 9% of Product sales in each of those years. The decrease in royalties as a percentage of Product sales over the past three years reflects the generally lower royalty obligation on our portfolio of iCell products, including a lower royalty obligation on our currently marketed version of iCell Cardiomyocytes. A portion of that reduction was due to the expiration in mid-2013, of an underlying patent licensed for use in the production of iCell Cardiomyocytes and iCell Neurons.
We anticipate that the gross margin from product sales in upcoming periods will likely be lower than that achieved throughout 2013. We expect that this decline will be driven principally by new product introductions and the growth of our MyCell product line.


Table of Contents

Research and development:
Research and development expenses include: (i) lab supplies, chemical reagents and finished goods internally consumed; (ii) salaries and related personnel expenses, including stock-based compensation, related to our research and development staffing; (iii) allocated and direct overhead and facilities expenses; and (iv) minimum royalties, royalties related to Collaborations, partnerships and other revenues, amortization of licenses and other license maintenance fees. Costs associated with delivering revenue identified as Collaborations, partnerships and other revenues are expensed as Research and development expense. We do not track research and development expenses by individual product, nor do we capitalize any research and development expenses.

                         Year ended                                             Year ended
                        December 31,                                           December 31,
(Dollars in                                   $ Change       % Change                                 $ Change      % Change
thousands)            2011         2012                                      2012         2013
Research and       $ 13,660     $ 14,301     $     641           5 %      $ 14,301     $ 16,622     $    2,321          16 %
development
Percentage of           526 %        217 %                                     217 %        140 %
total revenue
Ending headcount         54           59                                        59           63

Compensation and benefits as a percentage of Research and development expenses was 36% in 2011, 36% in 2012 and 32% in 2013. Materials and supplies as a percentage of Research and development expenses was 48% for 2011, 49% for 2012 and 52% in 2013. Materials and supplies expense in 2012 and 2013 was driven largely by development and technology transfer costs associated with iCell Hepatocytes and dopaminergic neurons. Overhead and facilities expenses as a percentage of Research and development expenses was 11% in 2011 and 2012 and 10% in 2013.
Research and development compensation and benefits included $109,000, $112,000 and $114,000 of stock compensation in 2011, 2012 and 2013, respectively. Research and development expenses also included amortization of license agreements and royalties. Amortization expense increased from $257,000 in 2011 to $347,000 in 2012 and to $522,000 in 2013 as we continued to invest in additional licenses necessary for the conduct of our business. See "Investing activities" below. Royalties related to Collaborations, partnerships and other revenues are also included in Research and development and amounted to just over $300,000 for both 2011 and 2012. In 2013, such royalties increased to $502,000. We expect to incur only modest expense increases in that portion of our current research and development organization devoted to new product development and ongoing development of existing products. What expense growth does occur is expected to come principally from work on planned new products, progress on workplans associated with current and new collaborators, support and upgrade of our current cell types and some additional research initiatives. In addition, future research and development costs will include the expenses necessary to perform on our recently announced CIRM contract, most of which will be incurred in our new California facility, and the costs associated with iCell Hepatocytes.


Table of Contents

Sales and marketing:
Our Sales and marketing expenses include: (i) salaries, commissions and related personnel expenses, including stock-based compensation, related to our sales, marketing and technical support and training staff; (ii) marketing programs, . . .

  Add ICEL to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for ICEL - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.