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HARVARD APPARATUS REGENERATIVE TECHNOLOGY, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.(Edgar Glimpses Via Acquire Media NewsEdge) Forward Looking Statements This Quarterly Report on Form 10-Q contains statements that are not statements of historical fact and are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). The forward-looking statements are principally, but not exclusively, contained in "Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements include, but are not limited to, statements about management's confidence or expectations, and our plans, objectives, expectations and intentions that are not historical facts. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "could," "would," "expects," "plans," "anticipates," "believes," "goals," "sees," "estimates," "projects," "predicts," "intends," "think," "potential," "objectives," "optimistic," "strategy," and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Factors that may cause our actual results to differ materially from those in the forward-looking statements include our ability to obtain and maintain regulatory approval for the bioreactors, scaffolds and other devices and product candidates we pursue; the success of our clinical trials and device and product development programs and the number of patients who can be treated with our products; the amount and timing of costs associated with our development of bioreactors, scaffolds and other devices and products; our failure to comply with regulations and any changes in regulations; our ability to access debt and equity markets; unpredictable difficulties or delays in the development of new technology; our collaborators not devoting sufficient time and resources to successfully carry out their duties or meet expected deadlines; our ability to attract and retain qualified personnel and key employees and retain senior management; our inability to operate effectively as a stand-alone, publicly traded company; the actual costs of separation may be higher than expected; the availability and price of acceptable raw materials and components from third-party suppliers; difficulties in obtaining or retaining the management and other human resource competencies that we need to achieve our business objectives; increased competition in the field of regenerative medicine and the financial resources of our competitors; our ability to obtain and maintain intellectual property protection for our device and product candidates; our inability to implement our growth strategy; plus factors described under the heading "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 31, 2014 or described in our other public filings. Our results may also be affected by factors of which we are not currently aware. We may not update these forward-looking statements, even though our situation may change in the future, unless we have obligations under the federal securities laws to update and disclose material developments related to previously disclosed information. Overview Our Business We are a clinical-stage regenerative medicine company developing life-saving regenerated organs for transplant. Our first product, the HART-Trachea, is intended to be used by surgeons to restore the structure and/or function of a severely damaged airway in patients who need an airway transplant. The HART-Trachea is comprised of the patient's own bone marrow cells seeded on our proprietary porous plastic scaffolding in our proprietary InBreathTM organ bioreactor. Our HART-Trachea has been used in six successful human airway transplant surgeries to date, each approved under compassionate use exemptions, but none of our products are yet approved by a government regulatory authority for marketing. In addition to pursuing our HART-Trachea product, we are also working with a number of leading researchers in their efforts to regenerate other organs. We use our depth of knowledge, our existing technologies and products and continued research and development to develop and provide devices to be used for growing organs outside the body for transplant. Business Drivers/Factors Affecting Results of Operations Our business efforts focus on developing and providing new synthetic scaffolds and organ bioreactor products to regenerative medicine researchers and practitioners. Going forward, we intend to generate revenues from the sale of regenerated organs and related bioreactors and scaffolds. Until we are able to commercialize our HART-Trachea product upon receipt of regulatory agency approvals to market that product for clinical use we expect our costs to exceed our revenues. Once we receive regulatory agency approvals to market the HART-Trachea product for surgeons to use in human trachea transplants, we expect to generate meaningful revenues. At that time, we anticipate that we will be paid on a per-procedure basis for the use of the HART-Trachea. Although we hope to eventually receive regulatory approvals to market additional regenerated organs, we expect that approval for the HART-Trachea and successful commercialization thereof could lead to sufficient sales for us to achieve profitability. 11 We began the first quarter 2014 with our pre-IND meeting with the FDA. Based on the feedback from that meeting, we expect to submit our IND request to the FDA in 2015. Between now and then we will be completing the required preclinical large animal model testing, the ex-vivo accelerated lifetime testing and protocol standardization required by the FDA. We expect similar requirements to apply for us to get approval to begin a clinical trial in Europe too. In the pre-IND meeting we did not discuss the design of our proposed clinical trial in any detail but we do expect to have several conversations with the FDA throughout this year as we develop both the pre-clinical testing protocols and proposed clinical trial design. At this point we expect the trial to be open-label and the trial design to be a single-arm trial. With single arm trials, it is important for the trial to be well enough controlled to show that the treatment caused the effect. We intend to propose the patient's lung function before the surgery as the control and the patient's lung function after the surgery as the endpoint. We intend to measure lung function using the FEV1, or forced expiratory volume in one second. This is a common endpoint used for approval in clinical trials for other therapies such as for cystic fibrosis. It was also the endpoint studied in the published 5-year follow up on the very first patient ever treated with a regenerated trachea. In that case the patient's FEV1 improved by approximately 85% from before the surgery to 3 months after the surgery. According to the American Thoracic Society, the change in FEV1 should be greater than 20% to be clinically significant in evaluations in this time frame. We also applied to the FDA for an orphan drug designation for the HART-Trachea. During the first quarter, the FDA informed us that they accepted our statistics on the number of patients that might require a trachea transplant, but they requested some follow up data on the patients treated so far with the HART-Trachea in order to complete their review of our application. We sent the requested follow up data to the FDA during the second quarter. We expect this submission to be sufficient for the FDA to determine whether or not it will grant orphan drug designation to the HART-Trachea, and we expect that the FDA will notify us of their decision in the next several weeks. During the second quarter, the European Medicines Agency (EMA), through its Committee for Advanced Therapies (CAT), informed us of CAT's conclusion that our HART-Trachea product is classified as a tissue-engineered, advanced therapy medicinal product, or Combined ATMP. This classification grants our HART-Trachea product a pathway to approval on a European Union-wide basis, although clinical trials are managed through individual countries' regulatory agencies there. We met with the Medicines and Healthcare Products Regulatory Agency of the U.K. (MHRA) in June to discuss the HART-Trachea product and the MHRA's views on certain preclinical studies, as well as our planned approach to clinical studies. We chose the U.K. to approach first in Europe due to the MHRA's familiarity with cell therapies, and the availability of surgeons and hospitals there that are already familiar with early progress in tissue-engineered products. Based on that meeting we continue to see a path to clinical trials and approval in Europe prior to the United States. Clinical Update During the second quarter, a sixth human tracheal transplant was performed using our HART-Trachea product, at Krasnodar Regional Hospital in Russia. The patient was a 24-year-old male suffering from extensive tracheal damage following an automobile accident. The surgery was a success and the patient was recovering well in the days following the procedure. Basis of Presentation Historically, we operated as part of Harvard Bioscience, and not as a stand-alone company. On October 31, 2013, Harvard Bioscience contributed the assets of its regenerative medicine business and $15 million of cash to HART, and on November 1, 2013 distributed all of the outstanding common shares of HART to Harvard Bioscience's shareholders on a pro-rata basis. The contribution and related separation is referred to herein as the "Separation" and the distribution is referred to herein as the "Distribution" and the "spin-off". The consolidated HART financial statements for periods prior to the Separation, were prepared on a stand-alone basis and were derived from the financial statements and accounting records of Harvard Bioscience using the historical basis of assets and liabilities of HART. Our financial statements from the periods prior to the Separation include expenses of Harvard Bioscience allocated to HART for certain functions provided by Harvard Bioscience, including, but not limited to, general corporate expenses related to executive services, finance, treasury, corporate income tax, human resources, legal services and investor relations. These expenses were allocated to HART on the basis of headcount, time devoted to HART activities, percentage of operating expenses or other relevant measures. Prior to the Separation, Harvard Bioscience used a centralized approach to manage substantially all of its liquid resources and to finance its operations and, as a result, no separate cash accounts for HART were historically maintained, and debt and liquid resources maintained at the Harvard Bioscience group level are not included in the accompanying consolidated financial statements prior to the Separation. Harvard Bioscience funded all of HART's operating and capital resource requirements prior to the Distribution. After October 31, 2013, the financial statements reflect the consolidated financial position and results of operations of the Company as an independent publicly traded company. 12 Relationship with Harvard Bioscience Prior to November 1, 2013, HART was a wholly-owned subsidiary of Harvard Bioscience, Inc. HART was incorporated on May 3, 2012 by Harvard Bioscience to provide a means for separating its regenerative medicine device business from its other businesses. Harvard Bioscience first focused on providing devices to scientists involved in regenerative medicine research in 2008. From early 2009 to the Separation, Harvard Bioscience's regenerative medicine device business initiative operated as a division of Harvard Bioscience. Harvard Bioscience decided to separate its regenerative medicine business into our company, a separate corporate entity, and then to spin off its interest in our business to its stockholders. On October 31, 2013, Harvard Bioscience contributed the assets of its regenerative medicine business and approximately $15 million in cash to us. On November 1, 2013, Harvard Bioscience spun off its interest in HART via a pro-rata distribution of its HART common shares to Harvard Bioscience's stockholders. As a result of that distribution, Harvard Bioscience is no longer a stockholder of our common stock and no longer controls our operations. We had no material assets or activities as a separate corporate entity until the contribution to us by Harvard Bioscience of those assets and that business. On October 31, 2013, we entered into agreements with Harvard Bioscience that will govern the Separation and various interim and ongoing relationships. They provide for, among other things, the transfer from Harvard Bioscience to us of assets and the assumption by us of liabilities comprising our businesses. In accordance with such agreements, we will pay Harvard Bioscience to provide continued services in the areas of accounting, payroll, facilities usage, benefits administration, human resources, information services and various other corporate services, operations, and engineering for periods ranging from six months to one year following the Distribution. All of the agreements relating to the Separation were made in the context of a parent-subsidiary relationship and were entered into in the overall context of the Separation. The terms of these agreements may be more or less favorable to us than if they had been negotiated with unaffiliated third parties. Harvard Bioscience is considered to be a related party to HART because David Green, our Chairman and CEO, is also a director of Harvard Bioscience. Results of Operations Components of Operating Loss Research and development expense. Research and development expense consists of salaries and related expenses, including stock-based compensation, for personnel and contracted consultants and various materials and other costs to develop our new products, primarily: synthetic organ scaffolds, including investigation and development of materials and investigation and optimization of cellularization; 3D organ bioreactors; and for periods prior to 2014, development costs of a stem cell injector, a product that we are not currently pursuing. Other research and development expenses include the costs of outside service providers and material costs for prototype and test units and outside testing facilities performing cell growth and materials experiments, as well as the costs of all other preclinical research and testing and expenses related to writing, issuing and defending our patents. We expense research and development costs as incurred. Sales and marketing expense. Sales and marketing expense consists primarily of salaries and related expenses, including stock-based compensation, for personnel performing sales, marketing, and business development roles, and costs associated with their travel and participation in trade shows and conferences. It also includes the costs of catalogs, marketing communications and web site development and maintenance. General and administrative expense. General and administrative expense consists primarily of salaries and other related expenses, including stock-based compensation, for personnel in executive, accounting, information technology and human resources roles. Other costs include professional fees for general legal and accounting services, insurance, investor relations and facility costs. Comparison of the three months ended June 30, 2014 to the three months ended June 30, 2013: Research and Development Expense Research and development expense was flat, at $1.2 million for the three months ended June 30, 2014 compared with $1.2 million for the three months ended June 30, 2013. An increase in fees related to patents and depreciation for lab and test equipment was offset by a year to year reduction of costs related to our stem cell injector development project which we terminated during 2013. Sales and Marketing Expense Sales and marketing expense increased approximately $54,000, or 155%, to $88,000 for the three months ended June 30, 2014 compared with $34,000 for the three months ended June 30, 2013. The increase was primarily due to additional salary-related costs of $60,000. 13 General and Administrative Expense General and administrative expense increased $0.5 million, or 57%, to $1.2 million for the three months ended June 30, 2014 compared with $0.8 million for the three months ended June 30, 2013. Of the $0.5 million increase, direct salary costs increased by $0.1 million over those allocated to HART by Harvard Bioscience for the three months ended June 30, 2013. General and administrative costs also increased by $0.3 million due to costs associated with being a stand-alone public company, such as external and internal accountants, information technology, legal fees, investor relations, director fees and insurance. Comparison of the six months ended June 30, 2014 to the six months ended June 30, 2013: Research and Development Expense Research and development expense was flat, at $2.4 million for the six months ended June 30, 2014 compared with $2.4 million for the six months ended June 30, 2013. A $0.4 million year to year increase in non-cash stock-based compensation expense related to the initial stock option grants made to employees at the time of the spin-off was offset by a year to year reduction of costs related to our stem cell injector development project which we terminated during 2013. Sales and Marketing Expense Sales and marketing expense increased approximately $110,000, or 201%, to $164,000 for the six months ended June 30, 2014 compared with $54,000 for the six months ended June 30, 2013. The increase was primarily due to additional salary-related costs of $127,000. General and Administrative Expense General and administrative expense increased $1.4 million, or 82%, to $3.0 million for the six months ended June 30, 2014 compared with $1.6 million for the six months ended June 30, 2013. Of the $1.4 million increase, $0.8 million was related to an increase in non-cash stock-based compensation expense related to the initial stock option grants made to employees at the time of the spin-off. Additionally, direct salary costs increased by $0.2 million over those allocated to HART by Harvard Bioscience for the six months ended June 30, 2013. General and administrative expense also increased by $0.5 million due to costs associated with being a stand-alone public company, such as external and internal accountants, information technology, legal fees, investor relations, director fees and insurance. Financial Condition, Liquidity and Capital Resources Sources of liquidity. We have incurred net losses since inception. Since inception, through the Separation, we received funding for operating losses from Harvard Bioscience and a $15.0 million cash contribution at the Separation. During the six month period ended June 30, 2014 we received $0.4 million of cash proceeds from exercise of stock options. We are currently investing significant resources in development and commercialization of products for use by clinicians and researchers in the field of regenerative medicine and have incurred operating losses to date. We expect to continue to incur operating losses and negative cash flows from operations at least until we receive regulatory approval to market a clinical product, as revenues from research bioreactors sales will not generate sufficient gross profits to offset our operating expenses. Operating activities. Net cash used in operating activities of $3.8 million for the six months ended June 30, 2014 reflected our $5.5 million net loss, offset by a $1.5 million add-back of non-cash stock-based compensation expense, a $0.1 million add-back for depreciation and $0.1 million of changes in working capital items. Net cash used in operating activities of $3.8 million for the six months ended June 30, 2013 reflected our $4.1 million net loss, offset by a $0.3 million add-back of non-cash stock-based compensation expense. Investing activities. Net cash used in investing activities during the six month periods ended June 30, 2014 and 2013 reflected additions to property, plant and equipment. 14 Financing activities. Cash generated from financing activities during the six months ended June 30, 2014 was primarily a result of employees' exercises of stock options. Cash generated from financing activities during the six months ended June 30, 2013 represented Harvard Bioscience's funding of our business activities. Recent Authoritative Accounting Guidance In June 2014, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2014-10, Development Stage Entities (Topic 915): "Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation", which removes the definition of a development stage entity from the Accounting Standards Codification, eliminated the requirement that development stage entities present inception-to-date information in the company's financial statements, label those financial statements as those of a development stage entity, disclose a description of the development stage activities in which they engage and disclose in the first year the entity is no longer a development stage entity that in prior years it had been. The ASU is effective retrospectively for fiscal years, and interim periods within those years, beginning after December 14, 2014. We have elected the permissible early application of the changes in the accompanying interim unaudited consolidated financial statements, and for all future periods. Critical Accounting Policies and Estimates The critical accounting policies underlying the accompanying unaudited consolidated financial statements are those set forth in Part II, Item 7 included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, which was filed with the SEC on March 31, 2014. |